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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

November 2003:

Terrorist Financing:

U.S. Agencies Should Systematically Assess Terrorists' Use of 
Alternative Financing Mechanisms:

GAO-04-163:

GAO Highlights:

Highlights of GAO-04-163, a report to congressional requesters 

Why GAO Did This Study:

Cutting off terrorists’ funding is essential to deterring terrorist 
operations. The USA PATRIOT Act expanded the ability of law 
enforcement and intelligence agencies to access and share financial 
information regarding terrorist investigations, but terrorists may 
have adjusted their activities by increasing use of alternative 
financing mechanisms. GAO was asked to assess (1) the nature of 
terrorists’ use of key alternative financing mechanisms for earning,
moving, and storing terrorists’ assets; (2) what is known about the 
extent of terrorists’ use of alternative financing mechanisms; and 
(3) challenges that the U.S. government faces in monitoring 
terrorists’ use of alternative financing mechanisms.

What GAO Found:

Terrorists use many alternative financing mechanisms to earn, move, 
and store assets (see table). They earn assets by selling contraband 
cigarettes and illicit drugs, by misusing charitable organizations 
that collect large donations, and by other means. They move funds by 
concealing their assets through nontransparent mechanisms such as 
charities, informal banking systems, and commodities such as precious 
stones and metals. To store assets, terrorists may choose similar 
commodities that maintain their value and liquidity.

The extent of terrorists’ use of alternative financing mechanisms is 
unknown, owing to the criminal nature of terrorists’ use of 
alternative financing mechanisms and the lack of systematic data 
collection and analysis of case information. The Federal Bureau of 
Investigation (FBI) does not systematically collect and analyze data 
on these mechanisms. Furthermore, the Departments of the Treasury and 
of Justice have not yet produced a report, required under the 2002 
National Money Laundering Strategy, which was to form the basis of a 
strategy to address how money is moved or value transferred via trade 
in precious stones and commodities.

In monitoring terrorists’ use of alternative financing mechanisms, 
the U.S. government faces a number of challenges, including accessing 
ethnically or criminally based terrorist networks, targeting high-risk 
financing mechanisms that the adaptable terrorists use, and sharing 
data on charities with state officials. The Internal Revenue Service 
(IRS) has committed to, but has yet to establish, procedures for such 
data sharing.

What GAO Recommends:

GAO recommends that (1) the Director of the FBI systematically 
collect and analyze data concerning terrorists’ use of alternative 
financing mechanisms; (2) the Secretary of the Treasury and the 
Attorney General produce the planned report based on up-to-date law 
enforcement investigations on precious stones and commodities; and (3) 
the IRS Commissioner establish interim procedures for sharing 
information on charities with state charity officials. 

The DOJ did not formally respond to our recommendation. The Treasury 
agreed to produce the planned report and IRS committed to expedite 
issuance of procedures.

www.gao.gov/cgi-bin/getrpt?GAO-04-163.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Loren Yager at (202) 
512-4128 or yagerl@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Terrorists Use Various Alternative Financing Mechanisms to Earn, Move, 
and Store Their Assets:

Extent of Use of Alternative Financing Mechanisms Is Unknown:

Key Challenges Impede Monitoring of Terrorists' Use of Alternative 
Financing Mechanisms:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Comments from the Department of the Treasury:

GAO Comments:

Appendix III: Comments from the Internal Revenue Service:

Appendix IV: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Tables:

Table 1: Key U.S. Government Entities Responsible for Deterring 
Terrorist Financing:

Table 2: Examples of Alternative Financing Mechanisms That May Be Used 
to Earn, Move, and Store Terrorist Assets:

Figures:

Figure 1: Hizballah Financiers Earn Assets through Cigarette Smuggling:

Figure 2: Location of Benevolence International Foundation Offices 
Worldwide:

Figure 3: Example of Hawala-type Transaction:

Abbreviations:

ATF: Bureau of Alcohol, Tobacco, Firearms, and Explosives: 
DEA: Drug Enforcement Administration: 
DHS: Department of Homeland Security: 
DOJ: Department of Justice: 
FBI: Federal Bureau of Investigation: 
FinCEN: Financial Crimes Enforcement Network: 
HAMAS: Harakat al-Muqawama al-Islamiya-Islamic Resistance Movement: 
ICE: Bureau of Immigration and Customs Enforcement: 
INTERPOL: International Criminal Police Organization: 
IRS: Internal Revenue Service: 
OGQ: Operation Green Quest: 
TFOS: Terrorist Financing Operations Section: 
U.N.: United Nations: 
USA PATRIOT Act: Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism Act:

United States General Accounting Office:

Washington, DC 20548:

November 14, 2003:

The Honorable Richard J. Durbin: 
Ranking Minority Member: 
Subcommittee on Oversight of Government Management, the Federal 
Workforce and the District of Columbia: 
Committee on Governmental Affairs: 
United States Senate:

The Honorable Charles E. Grassley: 
Chairman: 
Caucus on International Narcotics Control: 
United States Senate:

U.S. government officials recognize that cutting off terrorists' 
funding is an important means of disrupting their operations. The 
Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism Act (USA PATRIOT 
Act),[Footnote 1] enacted shortly after the terrorist attacks of 
September 11, 2001, expanded the ability of law enforcement and 
intelligence agencies to access and share financial information 
regarding terrorist investigations. As initial U.S. and foreign 
government deterrence efforts focused on terrorists' use of the formal 
banking or mainstream financial system, terrorists may have been forced 
to increase their use of various alternative financing mechanisms. 
These mechanisms enable terrorists to earn, move, or store assets and 
may include a variety of commodities and informal financial systems.

You requested that we review what is known about terrorists' use of 
alternative financing mechanisms.[Footnote 2] In response, in this 
report we assessed (1) the nature of terrorists' use of key alternative 
financing mechanisms for earning, moving, and storing terrorists' 
assets; (2) what is known about the extent of terrorists' use of 
alternative financing mechanisms; and (3) the challenges that the U.S. 
government faces in monitoring terrorists' use of alternative financing 
mechanisms. As agreed with your staff, the alternative mechanisms that 
this report addresses include the use of commodities, bulk 
cash,[Footnote 3] charities, and informal banking systems, sometimes 
referred to as hawala.[Footnote 4] We primarily focused on religious 
extremist movements in the Middle East noted in the National Strategy 
for Homeland Security, including al Qaeda, HAMAS (Harakat al-Muqawama 
al-Islamiya--Islamic Resistance Movement), and Hizballah. In a 
subsequent report that you have requested, we will specifically address 
coordination of U.S. and international efforts abroad to deter 
terrorists' use of alternative financing mechanisms.[Footnote 5]

In conducting our review, we examined documentation and interviewed 
officials from U.S. agencies, including the Departments of Justice, the 
Treasury, Homeland Security, State, and Defense, as well as from the 
intelligence community. We also assessed information provided from 
various nongovernmental organizations, industry and charitable 
associations, researchers in the field, and the United Nations. In 
addition, we conducted fieldwork in Belgium and France, where we 
interviewed officials from several international entities including the 
Financial Action Task Force on Money Laundering, INTERPOL 
(International Criminal Police Organization), the European Union, and 
the World Customs Organization. At these locations, we also assessed 
information from government, law enforcement, and industry officials, 
as well as U.S. embassy officials. As discussed with your offices and 
agreed with U.S. law enforcement agencies, we have limited our 
reporting of specific examples of terrorists' use of alternative 
financing mechanisms to publicly available information to ensure that 
law enforcement operations are not jeopardized. It is important to note 
that there are few such cases. Further details about our scope and 
methodology are contained in appendix I.

Results in Brief:

Terrorists use a variety of alternative financing mechanisms to earn, 
move, and store their assets based on common factors that make these 
mechanisms attractive to terrorist and criminal groups alike. For all 
three purposes--earning, moving, and storing--terrorists aim to operate 
in relative obscurity, using mechanisms involving close knit networks 
and industries lacking transparency. More specifically, first, 
terrorists earn funds through highly profitable crimes involving 
commodities such as contraband cigarettes, counterfeit goods, and 
illicit drugs. For example, according to U.S. law enforcement 
officials, Hizballah earned an estimated profit of $1.5 million in the 
United States between 1996 and 2000 by purchasing cigarettes in a low 
tax state for a lower price and selling them in a high tax state at a 
higher price. Terrorists also earned funds using systems such as 
charitable organizations that collect large sums in donations from both 
witting and unwitting donors. Second, to move assets, terrorists seek 
out mechanisms that enable them to conceal or launder their assets 
through nontransparent trade or financial transactions such as the use 
of charities, informal banking systems, bulk cash, and commodities that 
may serve as forms of currency, such as precious stones and metals. 
Third, to store assets, terrorists may use similar commodities, because 
they are likely to maintain value over a longer period of time and are 
easy to buy and sell outside the formal banking system.

Owing to the criminal nature of terrorists' use of alternative 
financing mechanisms and the lack of systematic data collection and 
analysis, the extent of terrorists' use of alternative financing 
mechanisms is not known. U.S. law enforcement agencies, and 
specifically the Federal Bureau of Investigation (FBI), which leads 
terrorist financing investigations, do not systematically collect and 
analyze data on alternative financing mechanisms. The lack of such data 
hinders the FBI from conducting systematic analysis of trends and 
patterns focusing on alternative financing mechanisms. Without such an 
assessment, the FBI does not have analyses that could aid in assessing 
risk and prioritizing efforts. Moreover, despite an acknowledged need 
for further analysis of the extent of the use of alternative financing 
mechanisms by terrorists, few rigorous studies have been conducted. For 
example, the Departments of the Treasury and Justice did not produce a 
report on the links between terrorist financing and precious stone and 
commodity trading, as was required by March 2003 under the 2002 
National Money Laundering Strategy.

In monitoring terrorists' use of alternative financing mechanisms, the 
U.S. government faces a number of significant challenges, a few of 
which include accessibility, adaptability of terrorists, and competing 
priorities. First, according to law enforcement agencies and 
researchers, it is difficult to access or infiltrate ethnically or 
criminally based networks that operate in a nontransparent manner, such 
as informal banking systems or the precious stones and other 
commodities industries. Second, the ability of terrorists to adapt 
their methods hinders efforts to target high-risk industries and 
implement effective mechanisms for monitoring high-risk industry trade 
and financial flows. According to the FBI, once terrorists know that an 
industry they use to earn or move assets is being watched, they may 
switch to an alternative commodity or industry. Finally, competing 
priorities create challenges to federal and state officials' efforts to 
use and enforce applicable U.S. laws and regulations in monitoring 
terrorists' use of alternative financing mechanisms. For example, 
although the Internal Revenue Service (IRS) agreed with us in 2002 to 
begin developing a system, as allowed by law, to share with states data 
that would improve oversight[Footnote 6] and could be used to deter 
terrorist financing in charities, the IRS has not made this initiative 
a priority due to competing priorities.

In this report, we recommend that the Director of the FBI, in 
consultation with relevant U.S. government agencies, systematically 
collect and analyze information involving terrorists' use of 
alternative financing mechanisms. We also recommend that the Secretary 
of the Treasury and the Attorney General produce the report on the 
links between terrorism and the use of precious stones and commodities 
that was required by March 2003 under the 2002 National Money 
Laundering Strategy based on up-to-date law enforcement investigations. 
Finally, we recommend that the Commissioner of the IRS, in consultation 
with state charity officials, establish interim IRS procedures and 
state charity official guidelines, as well as set milestones and assign 
resources for developing and implementing both, to regularly share data 
on charities as allowed by federal law.

The Department of Justice (DOJ) did not formally respond to our 
recommendation that the Director of the FBI, in consultation with 
relevant U.S. government agencies, systematically collect and analyze 
information involving terrorists' use of alternative financing 
mechanisms. However, in DOJ's technical comments they agreed with our 
finding that the FBI does not systematically collect and analyze such 
information, but they did not specifically agree or disagree with our 
recommendation. In response to our recommendation regarding a planned 
report on precious stones and commodities, the Department of the 
Treasury responded that the report would be issued as an appendix to 
the 2003 National Money Laundering Strategy. However, the strategy was 
to be issued in February 2003 and had not been issued as of our receipt 
of Treasury's comments on October 29. The IRS agreed with our overall 
recommendation to establish IRS procedures and state charity official 
guidelines to regularly share data on charities as allowed by federal 
law. The IRS also committed to expedite its efforts to establish 
procedures and guidelines by one year, the end of calendar year 2003, 
rather than 2004 as originally planned. However, the IRS did not 
address establishing milestones and assigning resources to meet the 
target date or interim guidelines should they miss the 2003 target 
date.

Background:

In its fight against terrorism, the United States has focused on 
individuals and entities supporting or belonging to terrorist 
organizations including al Qaeda, Hizballah, HAMAS and others. Al Qaeda 
is an international terrorist network led by Osama bin Laden that seeks 
to rid Muslim countries of western influence and replace their 
governments with fundamentalist Islamic regimes. The al Qaeda network 
conducted the September 11 attack on the United States and was 
responsible for the August 1998 bombings of U.S. embassies in Kenya and 
Tanzania, as well as other violent attacks on U.S. interests. Al Qaeda 
reportedly operates through autonomous underground cells in 60 to 100 
estimated locations worldwide, including the United States. Hizballah 
is a Lebanese group of Shiite militants that seeks to create a Muslim 
fundamentalist state in Lebanon modeled on Iran. Hizballah has planned, 
or been linked to, numerous terrorist attacks against America, Israel, 
and other western targets. Although Hizballah's leadership is based in 
Lebanon, Hizballah is a vast organization with a global network of 
supporters and established cells in Africa, North and South America, 
Asia, and Europe. According to the State Department, HAMAS has pursued 
the goal of replacing Israel with an Islamic Palestinian 
state.[Footnote 7] While HAMAS supplies humanitarian aid to 
Palestinians and has participated in peaceful political activity, the 
organization conducts large-scale suicide bombings. According to the 
State Department, HAMAS currently limits its terrorist operations to 
targeting Israeli civilians and the Israeli military in the Gaza Strip, 
the West Bank, and Israel, but Americans have been killed in HAMAS 
attacks, and the organization raises funds in North America and Western 
Europe.

These terrorist organizations are known to have used alternative 
financing mechanisms to further their terrorist activities. Government 
officials and researchers believe that terrorists do not always need 
large amounts of assets to support an operation, pointing out that the 
estimated cost of the September 11 attack was between $300,000 and 
$500,000. However, government officials also caution that funding for 
such an operation uses a small portion of the assets that terrorist 
organizations hold--assets earned, moved, or stored through mainstream 
financial or alternative financing mechanisms. According to the 
Treasury's Office of Foreign Assets Control, the support infrastructure 
critical for indoctrination, recruitment, training, logistical 
support, the dissemination of propaganda, and other material support 
requires substantial funding.

A number of strategies and laws guide the U.S. government in deterring 
terrorists' use of alternative financing mechanisms.[Footnote 8] Among 
the strategies, for example, the Departments of Justice and the 
Treasury publish an annual National Money Laundering Strategy, which 
has increasingly focused on terrorist financing, including alternative 
financing methods. This strategy sets goals for U.S. agencies in 
combating terrorist financing and reports on progress made in 
implementing these goals. In addition, the Department of State issues 
an annual International Narcotics Control Strategy Report,[Footnote 9] 
which features a section describing mechanisms, cases, and efforts to 
deter terrorist financing. Moreover, the President's National Security 
Strategy of the United States of America[Footnote 10] calls for the 
United States to work with its allies to disrupt the financing of 
terrorism by blocking terrorist assets, and the National Strategy for 
Combating Terrorism[Footnote 11] includes an objective to interdict and 
disrupt material support for terrorists. Regarding laws, the authority 
of the USA PATRIOT Act of 2001 significantly expanded U.S. law 
enforcement's ability to deter, investigate, and prosecute cases of 
terrorist financing. More recently, the United States enacted the 
Suppression of the Financing of Terrorism Convention Implementation Act 
of 2002,[Footnote 12] which implements the requirements of the 1999 
International Convention for the Suppression of the Financing of 
Terrorism. Among its provisions, this act makes it a crime to provide 
or collect funds with the intention of using the money for terrorist 
activities.[Footnote 13]

Deterring terrorists' use of alternative financing mechanisms falls 
within the overall U.S. interagency framework of plans, agency roles, 
and interagency coordination mechanisms designed to combat terrorism. 
In general, the National Security Council manages the overall 
interagency framework. The National Security Council heads the 
Counterterrorism Security Group, which is composed of high-level 
representatives (at the Assistant Secretary level) from key federal 
agencies that combat terrorism. To implement directives and strategies, 
various federal agencies are assigned key roles and responsibilities 
based on their core missions. Numerous components of the Departments of 
Justice, the Treasury, State, Homeland Security, and other agencies 
participate in efforts to combat terrorist financing (see table 1). In 
addition, the intelligence community plays a significant role.[Footnote 
14]

Table 1: Key U.S. Government Entities Responsible for Deterring 
Terrorist Financing:

Department: Central Intelligence Agency; Bureau/division/office: 
[Empty]; Role: Leads gathering, analyzing, and disseminating 
intelligence on foreign terrorist organizations and their financing 
mechanisms; charged with promoting coordination and information-
sharing between all intelligence community agencies.

Department: Homeland Security; Bureau/division/office: Bureau of 
Customs and Border Protection; Role: Detects movement of bulk cash 
across U.S. borders and maintains data about movement of commodities 
into and out of the United States.

Bureau/division/office: Bureau of Immigration and Customs Enforcement 
(ICE - formerly part of the Treasury's U.S. Customs Service); Role: 
Participates in investigations of terrorist financing cases involving 
U.S. border activities and the movement of trade, currency, or 
commodities.

Bureau/division/office: U.S. Secret Service; Role: Participates in 
investigations of terrorist financing cases, including those involving 
counterfeiting.

Department: Justice; Bureau/division/office: Bureau of Alcohol, 
Tobacco, Firearms, and Explosives (ATF); Role: Participates in 
investigations of terrorist financing cases involving alcohol, tobacco, 
firearms, and explosives.

Bureau/division/office: Civil Division; Role: Defends challenges to 
terrorist designations.

Bureau/division/office: Criminal Division; Role: Develops, 
coordinates, and prosecutes terrorist financing cases; participates in 
financial analysis and develops relevant financial tools; promotes 
international efforts and delivers training to other nations.

Bureau/division/office: Drug Enforcement Administration (DEA); Role: 
Participates in investigations of terrorist financing cases involving 
narcotics and other illicit drugs.

Bureau/division/office: Federal Bureau of Investigation (FBI); Role: 
Leads all terrorist financing investigations and operations; primary 
responsibility for collecting foreign intelligence and 
counterintelligence information within the United States.

Department: National Security Council; Bureau/division/office: 
[Empty]; Role: Manages the overall interagency framework for combating 
terrorism.

Department: State; Bureau/division/office: Bureau of Economic and 
Business Affairs; Role: Chairs coalition subgroup of a National 
Security Council Policy Coordinating Committee, which leads U.S 
government efforts to develop strategies and activities to obtain 
international cooperation.

Bureau/division/office: Bureau of International Narcotics and Law 
Enforcement Affairs; Role: Implements U.S. technical assistance and 
training to foreign governments on terrorist financing.

Bureau/division/office: Office of the Coordinator for 
Counterterrorism; Role: Coordinates U.S. counterterrorism policy and 
efforts with foreign governments to deter terrorist financing.

Department: Treasury; Bureau/division/office: Executive Office for 
Terrorist Financing and Financial Crime; Role: Develops U.S. strategies 
and policies to deter terrorist financing, domestically and 
internationally; develops and implements the National Money Laundering 
Strategy as well as other policies and programs to prevent financial 
crimes.

Bureau/division/office: Financial Crimes Enforcement Network (FinCEN); 
Role: Supports law enforcement investigations to prevent and detect 
money laundering, terrorist financing, and other financial crime 
through use of analytical tools and information-sharing mechanisms; 
administers the Bank Secrecy Act.

Bureau/division/office: Internal Revenue Service (IRS) Criminal 
Investigation; Role: Participates in investigations of terrorist 
financing cases with an emphasis on charitable organizations.

Bureau/division/office: IRS Tax Exempt and Government Entities; Role: 
Administers the eligibility requirements and other IRS tax law that 
apply to charitable and other organizations that claim exemption from 
federal income tax.

Bureau/division/office: Office of Foreign Assets Control; Role: 
Develops and implements U.S. strategies and policies to deter terrorist 
financing; imposes controls on transactions; and freezes foreign assets 
under U.S. jurisdiction.

Bureau/division/office: Office of the General Counsel; Role: Chairs 
Policy Coordination Committee for Terrorist Financing, which 
coordinates U.S. government efforts to identify and deter terrorist 
financing; coordinates U.S. government actions regarding 
implementation of, and imposition of, economic sanctions under 
Executive Order 13224 with respect to the freezing of terrorist-related 
assets.

Bureau/division/office: Office of International Affairs; Role: 
Provides advice, training, and technical assistance to nations on 
issues including terrorist financing deterrence.

Sources: GAO, using information from the Departments of Justice, the 
Treasury, State, and Homeland Security.

[End of table]

Terrorists Use Various Alternative Financing Mechanisms to Earn, Move, 
and Store Their Assets:

Terrorists use an assortment of alternative financing mechanisms to 
earn, move, and store their assets. Terrorists, like other criminals, 
focus on crimes of opportunity in vulnerable locations worldwide and 
seek to operate in relative obscurity by taking advantage of close-knit 
networks of people and nontransparent global industry flows when 
earning, moving, and storing their assets.[Footnote 15] To earn assets, 
they focus on profitable crimes or scams involving commodities such as 
smuggled cigarettes, counterfeit goods, and illicit drugs and the use 
of systems such as charitable organizations that collect large sums. To 
move assets, terrorists use mechanisms that enable them to conceal or 
launder their assets through nontransparent trade or financial 
transactions such as charities, informal banking systems, bulk cash, 
and commodities such as precious stones and metals. To store assets, 
terrorists may use commodities that are likely to maintain their value 
over time and are easy to buy and sell outside the formal banking 
system. For example, terrorists may use precious stones and metals that 
serve as effective forms of currency. Table 2 shows examples of 
mechanisms that terrorists may use to earn, move, and store assets and 
also shows that terrorists may use assets for more than one purpose.

Table 2: Examples of Alternative Financing Mechanisms That May Be Used 
to Earn, Move, and Store Terrorist Assets:

Alternative financing mechanisms: Trade in commodities: 

Alternative financing mechanisms: Illicit drugs; Earning: Yes; Moving: 
No; Storing: No.

Alternative financing mechanisms: Weapons; Earning: Yes; Moving: No; 
Storing: No.

Alternative financing mechanisms: Cigarettes; Earning: Yes; Moving: 
No; Storing: No.

Alternative financing mechanisms: Diamonds; Earning: Yes; Moving: Yes; 
Storing: Yes.

Alternative financing mechanisms: Gold; Earning: No; Moving: Yes; 
Storing: Yes.

Alternative financing mechanisms: Systems; Earning: No; Moving: 
No; Storing: No.

Alternative financing mechanisms: Charities; Earning: Yes; Moving: Yes; 
Storing: No.

Alternative financing mechanisms: Informal banking; Earning: No; 
Moving: Yes; Storing: No.

Alternative financing mechanisms: Currency; Earning: No; Moving: 
No; Storing: No.

Alternative financing mechanisms: Bulk cash; Earning: No; Moving: 
Yes; Storing: Yes.

Sources: GAO analysis based on information from government, industry, 
and research sources as noted in the scope and methodology.

[End of table]

Terrorists Earn Assets via Systems and Commodities That Are Highly 
Profitable:

Terrorists earn assets through illicit trade in myriad commodities, 
such as drugs, weapons, and cigarettes, and systems, such as charities, 
owing to their profitability. Like other criminals, terrorists can 
trade any commodity in an illegal fashion, as evidenced by their 
reported involvement in trading a variety of counterfeit and other 
goods.[Footnote 16] However, although terrorists are generally 
motivated by ideological factors rather than pure profit, terrorists, 
like other criminals, benefit most from smuggling those commodities 
with the highest profit margins. Terrorist organizations have also 
earned funds using systems such as charitable organizations. The 
potential misuse of charitable contributions by terrorist organizations 
can take many forms, sometimes with the knowledge of the charity or 
donor and sometimes without their knowledge.

Trafficking in Illicit Drugs and Weapons to Earn Assets:

Globally, trafficking in illicit drugs and weapons is a profitable 
means for terrorists to earn assets. Terrorists have been reportedly 
involved in trafficking illicit drugs, the most lucrative commodity 
illegally traded, according to the U.S. State Department's Bureau of 
International Narcotics and Law Enforcement Affairs.[Footnote 17] 
According to the U.S. State Department's 2003 International Narcotics 
Control Strategy Report, this trade is valued in the billions and 
allows drug traffickers to corrupt government and law enforcement 
officials worldwide, particularly in countries with weakly enforced 
laws and regulations where officials are poorly paid. In East Asia, 
trafficking in drugs and weapons--as well as engaging in organized 
crime and official corruption--are serious international crimes that 
terrorist organizations have exploited to finance their 
operations.[Footnote 18] In South Asia, al Qaeda is reported to have 
trafficked heroin to support its operations and Osama bin Laden was 
reportedly involved.[Footnote 19] In Latin America, terrorists 
trafficked in drugs and arms to finance their activities. In some South 
American countries, international terrorist groups have established 
support bases that sustain their worldwide operations. For example, the 
triborder area where the borders of Argentina, Brazil, and Paraguay 
converge continues to be a safe haven for Hizballah and HAMAS, where 
the organizations raise funds to finance their operations through 
criminal enterprises. According to the DEA, terrorist operatives 
associated with Hizballah generate significant income from contraband, 
including drugs in several Latin American countries, to support their 
organization in Lebanon.

Cigarette Smuggling and Counterfeiting to Earn Assets:

Terrorists have earned assets through the highly profitable illicit 
trade in cigarettes. According to officials from the ATF, Hizballah, 
HAMAS, and al Qaeda have earned assets through trafficking in 
contraband cigarettes or counterfeit cigarette tax stamps.[Footnote 20] 
ATF officials told us that as of August 20, 2003, they were 
investigating at least six such cases with ties to terrorist groups. 
ATF officials also believe that there are several other investigations 
under way that may produce evidence linking them to terrorist groups. 
In the one closed case example, during 2002, an ATF investigation 
revealed a conspiracy where the defendants were illegally trafficking 
cigarettes from 1996 to 2000 between North Carolina, a low tax state, 
and Michigan, a high tax state, and funneling some of the illegal 
proceeds back to the Hizballah. In this case, family and religious ties 
enabled the smugglers to sell illegal cigarettes at a network of small 
convenience stores in Michigan. Figure 1 shows how the Charlotte, North 
Carolina, Hizballah cell profited from this illegal activity. The total 
value of the assets seized was about $1.5 million and consisted of 
cigarettes, real property, and currency. The investigation resulted in 
at least two convictions, in June 2002, for cigarette trafficking, 
money laundering, and providing material support to a terrorist 
organization.[Footnote 21] More generally, the opportunity to earn 
illegal profits in the cigarette industry is significant given the 
growing trend of counterfeit cigarettes and Internet cigarette 
sales.[Footnote 22] According to a European Commission Anti-Fraud 
Office official, cigarette smuggling is widespread in Europe, and in 
many eastern European countries smuggled cigarettes are commonly used 
as currency. (The Anti-Fraud Office could not formally discuss ongoing 
cases involving terrorists' links, because it would jeopardize ongoing 
investigations.):

Figure 1: Hizballah Financiers Earn Assets through Cigarette Smuggling:

[See PDF for image]

[End of figure]

Misuse of Charitable Organizations to Earn Assets:

Terrorist organizations have earned funds using systems such as 
charitable organizations that provide a ready source of sizable funds 
generated from religious, ethnic, or geographic ties between people 
with similar interests.[Footnote 23] In many countries, charitable 
giving is a religious duty and, although most contributions are 
intended for legitimate humanitarian purposes, terrorists are able to 
divert these funds owing to the lack of oversight or financial controls 
for charities to ensure that moneys are spent according to their 
intended purpose. The potential misuse of charitable contributions by 
terrorist organizations can take many forms. According to the Financial 
Action Task Force on Money Laundering's 2002-2003 Report on Money 
Laundering Typologies, some charitable organizations were established 
with a stated charitable purpose but may actually exist in part or only 
to earn funds for a terrorist organization. For example, according to 
the Treasury, Holy Land Foundation for Relief and Development in Texas 
raised $13 million in the United States in 2000, claiming that the 
money it solicited went to care for needy Palestinians, although 
evidence shows that HAMAS used some of the money that the Holy Land 
Foundation raised to support suicide bombers and their 
families.[Footnote 24] Terrorists or their supporters may also 
infiltrate legitimate charitable organizations and divert funds to 
directly or indirectly support terrorist organizations. In both cases, 
the charitable organizations may collect donations from both witting 
and unwitting donors. An example of a witting donor would be one who 
donated funds to a charity knowing that the funds would go to al Qaeda. 
An unwitting donor would be one who donated funds to the charity not 
knowing that funds would go to al Qaeda.

Terrorists Move Assets via Systems and Commodities That Allow Ease of 
Concealment and Liquidity:

To move assets, terrorists use mechanisms that enable them to conceal 
or launder their assets through nontransparent trade or financial 
transactions such as charities, informal banking systems, bulk cash, 
and commodities such as precious stones and metals. Although charities 
and informal banking systems serve many legitimate purposes, they 
entail a significant degree of nontransparency that terrorist groups 
and their supporters can exploit to move funds raised in the United 
States and elsewhere across borders. To carry assets across borders 
without detection, terrorists seek to smuggle bulk cash or convert 
their assets into commodities that are relatively liquid and easy to 
conceal. Terrorists can also convert their assets into internationally 
traded commodities that serve as forms of currency, such as gold, but 
are not subject to standard financial reporting requirements. 
Commodities that can be smuggled owing to their ease of concealment are 
particularly attractive. While terrorists use legitimate systems and 
commodities in an illicit manner to move their assets, they may also 
use illicit means such as trade-based money laundering to move assets 
or settle accounts. Moreover, according to law enforcement officials, 
they may use more than one mechanism, layering their activities, to 
better hide the trail of their transactions.

Misuse of Charities to Move Assets:

Terrorists may be attracted to charities to move their assets owing to 
the industry's nontransparent nature. According to the Financial Action 
Task Force on Money Laundering's 2002-2003 Report on Money Laundering 
Typologies, in addition to serving as a direct source of income, some 
charities may have served as a cover for moving funds to support 
terrorist activities, usually on an international basis. For example, 
according to court documents,[Footnote 25] the Global Relief 
Foundation, an Illinois-based charity, sends more than 90 percent of 
its donations abroad, and, according to DOJ, the foundation has 
connections to and has provided support and assistance to individuals 
associated with Osama bin Laden, the al Qaeda network, and other known 
terrorist groups. The Global Relief Foundation has also been linked to 
financial transactions with the Holy Land Foundation. Similarly, the 
DOJ asserts that the Illinois-based Benevolence International 
Foundation moved charitable contributions fraudulently solicited from 
donors in the United States to locations abroad to support terrorist 
activities.[Footnote 26] As shown by the shaded locations in figure 2, 
the foundation has offices worldwide through which it could facilitate 
the global movement of its funds.

Figure 2: Location of Benevolence International Foundation Offices 
Worldwide:

[See PDF for image]

[End of figure]

Misuse of Informal Banking Systems to Move Assets:

Terrorist organizations use a type of informal banking system sometimes 
known as hawala to move their assets, owing to the system's 
nontransparent and liquid nature. An informal banking system is one in 
which money is received for the purpose of making it, or an equivalent 
value, payable to a third party in another geographic location, whether 
or not in the same form. Such transfers generally take place outside 
the conventional banking system through nonbank money services 
businesses or other, often unregulated and undocumented, business 
entities whose primary business activity may not be the transmission of 
money.[Footnote 27] Traditionally, expatriates--traders and immigrant 
laborers--used informal banking systems by sending money home from or 
to countries lacking formal and secure banking systems. Informal 
systems are still used by immigrant ethnic populations in the United 
States and elsewhere today.[Footnote 28] Such systems are based on 
trust and the extensive use of connections such as family relationships 
or regional affiliations. These systems also often involve transactions 
out of the United States to remote areas with no formal banking system 
or to countries with weak financial regulations, such as Afghanistan 
and Somalia, where the Al Barakaat informal banking system moved funds 
for al Qaeda. Figure 3 provides an example of how a simple hawala 
transaction can occur.

Figure 3: Example of Hawala-type Transaction:

[See PDF for image]

[End of figure]

According to FinCEN, while the majority of informal banking systems' 
activity may be legitimate in purpose, these systems have been used to 
facilitate the financing of terrorism and the furtherance of criminal 
activities.[Footnote 29] As a result, law enforcement and international 
entities have focused a great deal of attention on the possibility that 
terrorist financing takes place through informal banking systems such 
as hawala to move money, particularly since September 11. For example, 
according to the FBI, some of the 19 September 11 hijackers allegedly 
used hawala to transfer thousands of dollars in and out of the United 
States prior to their attacks. Somalis working in the United States 
used the Al Barakaat informal banking network, founded with a 
significant investment from Osama bin Laden, to send money to their 
families in Somalia.[Footnote 30] According to a September 2002 
Treasury fact sheet on terrorist financing, Al Barakaat's worldwide 
network was channeling several million dollars a year to and from al 
Qaeda.[Footnote 31]

Smuggling of Bulk Cash to Move Assets:

The law enforcement community has long suspected that some terrorist 
organizations use bulk cash smuggling to move large amounts of 
currency. Bulk cash smuggling is an attractive financing mechanism 
because U.S. dollars are accepted as an international currency and can 
always be converted; there is no traceable paper trail; there is no 
third party such as a bank official to become suspicious of the 
transaction; and the terrorist has total control of the movement of the 
money. Conversely, the factors against cash smuggling include the costs 
of couriers and equipment, the risk of the courier stealing the money, 
the risk of informants within the network, or losses due to border 
searches or government inquiries that could compromise the network or 
mission. In the United States, bulk cash smuggling is a money 
laundering and terrorism financing technique that is designed to bypass 
financial transparency reporting requirements.[Footnote 32] Often the 
currency is smuggled into or out of the United States concealed in 
personal effects, secreted in shipping containers, or transported in 
bulk across the border via vehicle, vessel, or aircraft. According to 
the FBI, some of the 19 September 11 hijackers allegedly used bulk cash 
as another method to transfer funds.

Furthermore, in response to the September 11 events, Customs[Footnote 
33] initiated an outbound-currency operation, Operation Oasis, to 
refocus its efforts to target 23 identified nations involved in money 
laundering. According to the Department of Homeland Security's (DHS) 
ICE, between October 1, 2001, and August 8, 2003, Operation Oasis had 
seized more than $28 million in bulk cash. However, according to ICE 
officials, while some of the cases involved were linked to terrorism, 
they were unable to determine the number and the extent to which these 
cases involved terrorist financing.

Trafficking in Precious Stones and Metals to Move Assets:

Terrorist organizations have also reportedly traded in precious stones 
such as diamonds to launder money or transfer value because it is easy 
to conceal these materials and transfer them. Terrorists can move their 
assets by converting moneys into a commodity, such as diamonds, that 
serves as a form of currency. U.S. law enforcement and others told us 
that there is a potential for the use of gold to move assets, but 
little has been reported on the link between terrorists and gold, other 
than by the media.

As we previously reported,[Footnote 34] diamonds can be used in lieu of 
currency in arms deals, money laundering, and other crimes. Diamonds 
are also easily smuggled because they have high value and low weight 
and are untraceable and odorless.[Footnote 35] The international 
diamond industry is fragmented, with numerous small mining operations 
located in remote areas of Africa, in countries that have porous 
borders and no rule of law. There is limited transparency in diamond 
flows owing to the complex way in which diamonds move from mine to 
consumer, the existence of significant data inconsistencies, and the 
industry's historical avoidance of close scrutiny. Diamonds are often 
traded fraudulently, and smuggling routes for rough diamonds are well 
established by those who have used such routes for decades to evade 
taxes or move stolen diamonds. According to a Belgian law enforcement 
official, a substantial number of the diamonds traded in Antwerp, the 
world's largest trading center, are sold on the black market with no 
transaction records. Most officials and researchers we spoke with 
recognized a highly probable link between Hizballah and a part of the 
Lebanese diamond-trading network in West Africa. The U.N. Special Court 
Chief Prosecutor and the Chief Investigator in Sierra Leone both 
reported that the problem is current.

Moreover, though U.S. law enforcement has been unable to substantiate 
the reports, officials from the U.N. Special Court for Sierra 
Leone,[Footnote 36] representatives of Global Witness (a London-based 
nongovernmental organization), media, and other U.S. and international 
experts have also stated that al Qaeda was reportedly buying diamonds 
from rebel groups in West Africa in the months leading up to September 
11 and may still be involved in the trade.[Footnote 37] According to 
officials of the U.N. Special Court and Global Witness, they have 
witnesses of such a connection. U.S. government officials both within 
and among agencies remain divided over whether there is sufficient 
evidence to establish a current link between al Qaeda and the diamond 
trade.

Gold also presents an opportunity for moving terrorist assets.[Footnote 
38] As highlighted in a number of money-laundering cases, gold can be 
smelted into any form, camouflaged, and smuggled across borders. 
Because its form can be altered, gold used in trade often has no valid 
paper trail.

Use of Trade-based Money Laundering to Move Assets:

ICE officials and researchers have focused on the possibility that 
terrorists may use trade-based money laundering to move their assets, 
owing to its criminal and nontransparent nature. [Footnote 39] ICE 
defines trade-based money laundering as the use of trade to legitimize, 
conceal, transfer, and convert large quantities of illicit cash into 
less conspicuous assets such as gold or diamonds. In turn, these 
criminal proceeds are transferred worldwide without being subject to 
bank secrecy laws. For example, hawala operators reportedly use false 
(under-or over-) invoicing[Footnote 40] to balance books or move 
assets. According to the FBI, some cases of terrorist use of trade-
based money laundering to move assets may exist but are too sensitive 
for discussion at this time.

Terrorist Organizations May Store Assets in Cash or Commodities That 
Serve as Forms of Currency and Maintain Value and Liquidity:

Terrorists may store assets in cash, or in commodities, that serve as 
forms of currency that are likely to maintain value over longer periods 
of time and are easy to buy and sell outside the formal banking system. 
However, little has been reported concerning the storing of terrorist 
assets in alternative financing mechanisms. The FBI testified in the 
case of the United States versus the Benevolence International 
Foundation that a key associate of Osama bin Laden kept thousands of 
dollars of cash in several currencies in shoeboxes in his 
apartment.[Footnote 41] According to a September 2002 United Nations 
Security Council letter, al Qaeda was believed to have shifted a 
portion of its assets to gold, diamonds, and other untraceable 
commodities. In 2002, we reported that diamonds might be used as a 
store of wealth for those wishing to hide assets outside the banking 
sector, where assets could be detected and seized.[Footnote 42] 
According to Global Witness, a nongovernmental organization, British 
forces in Afghanistan found an al Qaeda training manual in December 
2001 that addressed how to smuggle gold. While various press reports 
suggested that al Qaeda was shifting assets into gold last fall, U.S. 
law enforcement has been unable to substantiate these allegations. 
Terrorists may store their assets in gold because its value is easy to 
determine and remains relatively consistent over time. There is always 
a market for gold given its cultural significance in many areas of the 
world, such as Southeast Asia, South and Central Asia, the Arabian 
Peninsula, and North Africa.[Footnote 43] Gold is considered a global 
currency and is easily exchanged throughout the world.

Extent of Use of Alternative Financing Mechanisms Is Unknown:

The true extent of terrorist use of alternative financing mechanisms is 
unknown, owing to the criminal nature of the activity and the lack of 
systematic data collection and analyses. Although we recognize that the 
criminal nature of terrorist financing prevents knowing the full extent 
of their use of alternative mechanisms, systematic data collection and 
analyses of case data does not yet exist to aid in determining the 
magnitude of the problem. The limited and sometimes conflicting 
information available on alternative financing mechanisms adversely 
affects the ability of U.S. government agencies to assess risk and 
prioritize efforts on terrorist financing mechanisms.

Criminal Nature of Terrorists' Use of Alternative Financing Mechanisms 
Precludes Knowledge of True Extent:

It would be unrealistic to expect U.S. law enforcement to determine the 
full extent of terrorist or criminal use of alternative financing 
mechanisms. As we noted, terrorists, like other criminals, strive to 
operate in obscurity and thus seek out nontransparent mechanisms that 
have little or no paper trail, often operating in weakly regulated 
industries. The terrorist link may be difficult to determine or define. 
While dollar amounts of funds frozen in terrorist-related bank accounts 
have been used to serve as rough indicators of the extent of terrorist 
financial flows through the formal financial networks, researchers and 
government officials have presented few such indicators about terrorist 
assets outside of formal mechanisms.[Footnote 44] Further, limited 
useful information exists about the total annual flow of assets through 
some types of alternative financing mechanisms, such as informal 
banking systems, and on what portion of that total may be terrorist 
assets. For example, there is a wide range of estimates about the total 
annual flow of transactions through informal banking systems; the 
United Nations estimates $200 billion, the World Bank and International 
Monetary Fund estimate tens of billions of dollars, and a FinCEN report 
noted that quantifying the amount with certainty is impossible. 
Moreover, officials and researchers we spoke with could not provide 
estimates on the extent of terrorist use of informal banking systems 
and other alternative financing mechanisms.

U.S. Law Enforcement Does Not Systematically Collect and Analyze Data 
on Terrorists' Use of Alternative Financing Mechanisms:

U.S. law enforcement agencies--specifically, the FBI, which leads 
terrorist financing investigations and operations--do not 
systematically collect and analyze data on terrorists' use of 
alternative financing mechanisms.[Footnote 45] When agencies inform the 
FBI that an investigation has a terrorist component, the FBI opens a 
terrorism case. However, the FBI cannot, through its existing 
processes, furnish the numbers of open or closed terrorist financing 
cases and cannot furnish the numbers of those cases broken down by 
funding source. According to the FBI's Terrorist Financing Operations 
Section (TFOS) officials,[Footnote 46] most, if not all, terrorist 
cases involve a financial aspect, known as a "funding nexus," which is 
normally considered to be a component of the overall investigation. 
However, the FBI does not currently isolate terrorist financing cases 
from substantive international terrorism cases, and its data analysis 
programs do not designate the source of funding (i.e., charities, 
commodities, etc.) for terrorist financing. The lack of such data 
hinders the FBI from conducting systematic analysis of trends and 
patterns focusing on alternative financing mechanisms from its case 
data. Without such an assessment, the FBI would not have analyses that 
could aid in assessing risk and prioritizing efforts to address these 
and other mechanisms. According to TFOS, it and the DOJ 
Counterterrorism Section have initiated a number of proactive data 
mining[Footnote 47] and data link analyses using a number of government 
and private data sources to identify potential terrorists and 
terrorist-related financing activities, but these initiatives 
generally focus on formal financial systems, not alternative financing 
mechanisms.

According to the Chief of TFOS, the FBI plans to collect information 
from the field offices through its Crime Survey/Threat Assessment and 
Annual Field Office Reports, and these tools might include information 
on alternative financing mechanisms. However, the formats and results 
of these tools were not available to us during our review. Although the 
FBI reported that it solicited information from the field on identified 
threats and efforts including terrorist financing, we received no 
evidence showing that these reports addressed alternative financing 
mechanisms using a systematic methodology. The FBI disseminated its 
Crime Survey/Threat Assessment to all of its field offices, and the 
responses were due to FBI headquarters in August 2003 after we 
completed our fieldwork. According to the TFOS Chief, this information 
from the field was to highlight the threats identified in the field and 
might include discussions of alternative financing mechanisms. Also, 
according to the TFOS Chief, the Annual Field Office Reports were to be 
disseminated in April 2003 and finalized before conclusion of our 
fieldwork on July 30, 2003. However, as of July 30, 2003, the Annual 
Field Office Reports had not been finalized, and their status was 
unavailable. According to the TFOS Chief, the Annual Field Office 
Reports, once finalized in their new format, would furnish myriad 
useful documentation concerning the FBI's efforts within the 
International Terrorism program and the terrorist financing arena. 
However, it remained unclear to what extent these documents would 
address alternative financing mechanisms.

The DHS's ICE, which participates in terrorist financing investigations 
in coordination with the FBI, also does not systematically collect and 
analyze data on terrorists' use of alternative financing mechanisms. 
The former U.S. Customs Service initiated Operation Green Quest (OGQ) 
in October 2001 to focus on terrorist financing,[Footnote 48] and some 
of its data collection and analysis were intended to focus on 
alternative financing mechanisms. However, first, Customs officials 
were unable to furnish accurate numbers of open and closed terrorist 
financing cases. According to OGQ officials, they had approximately 580 
open terrorist financing cases and 559 closed cases between OGQ's 
inception in October 2001 and February 2003. However, Customs officials 
told us that, although cases may initially be thought to have a 
terrorist link and be categorized as such in their database, they might 
not be recategorized as nonterrorist cases once no terrorist link was 
found. Rather, the database captured criminal cases that may or may not 
have had a terrorist link; and the number of actual cases with a 
terrorist link, which would also depend on how "link" is defined, is 
not readily known. Second, ICE officials and former OGQ officials 
confirmed that they could not readily distinguish among the types of 
alternative financing mechanisms in their case database. According to 
these officials, it would take an intensive effort to segregate data by 
categories of alternative financing mechanisms. They said that they 
believed they could accomplish this, but that it would take resources 
and time, because the system was not set up to search for these 
mechanisms. Further, this method does not identify a terrorist link, 
requiring further effort to determine whether such a link existed.

Moreover, while ICE officials use an analytical tool known as the 
Numerically Integrated Information System to investigate money 
laundering, terrorist financing, and other criminal activities, the 
tool, while useful, could not be used to automatically analyze 
information on alternative methods of terrorist financing and the 
extent of their use. The tool enables users to analyze databases for 
anomalies, criminal patterns, and specific transactions in global 
commerce when the user knows what to look for, based on other 
information or a tip; however, the tool does not automatically identify 
problem areas for attention. For example, if ICE officials know to 
compare export and import data between the United States and another 
country, and that country shares its data, then trade anomalies can be 
identified and further investigated using a number of databases and 
features. Customs officials used the system to identify money 
laundering based on irregular patterns in the gold trade between the 
United States and Argentina. However, the tool cannot be used to 
automatically flag anomalies in all U.S. imports and exports. Officials 
agreed that an automated feature would be beneficial and they believed 
that it would be developed in the future.[Footnote 49] Further, 
according to the May 13, 2003, DOJ and DHS memorandum of agreement 
concerning the FBI's management of terrorist financing cases, resulting 
DHS analyses will be shared with the FBI, but it remains unclear how or 
if this information might be integrated with FBI databases or analyses.

Analysis and Reporting on Terrorist Use of Alternative Financing Is 
Limited and Sometimes Conflicting:

Despite an acknowledged need from some U.S. government officials and 
researchers for further analysis of the extent of terrorists' use of 
alternative financing mechanisms, in some cases, U.S. government 
reporting on these issues has not always been timely or comprehensive. 
This could affect planning efforts. Upon requesting U.S. government 
studies on terrorist or criminal use of alternative financing 
mechanisms, we found that few rigorous studies exist. We also found 
that studies from researchers and information from various government 
and nongovernmental sources sometimes conflict.

The Departments of the Treasury and of Justice have yet to produce 
their report on how money is being moved or value is being transferred 
via the trade in precious stones and commodities. This report was 
required by March 2003 under the 2002 National Money Laundering 
Strategy. The information gained in the report was to form the basis of 
an informed strategy for addressing this financing mechanism. According 
to Treasury officials, the report was drafted in April and will be 
released as an appendix in the yet-to-be-released 2003 National Money 
Laundering Strategy. The draft was not made available for our review, 
and it remains unclear whether the report addresses the recent 
investigative efforts of other U.S. government and international 
entities on this subject. Moreover, we found widely conflicting 
information in numerous interviews concerning the use of precious 
stones and commodities and in the available reports and documentation.

Further, while a Treasury report to Congress on informal value transfer 
systems, required under the USA PATRIOT Act,[Footnote 50] described 
informal banking systems and related regulations, as required, it did 
not discuss terrorist use of such systems and did not include a review 
of the potential use of precious stones and commodities in such 
systems. While a discussion of precious stones and commodities was not 
specifically required under the USA PATRIOT Act, the report notes that 
there is a need for further research, particularly with regard to 
understanding the range of mechanisms associated with informal banking 
systems, including the use of gold and precious gems in hawala 
transactions, among others.

Key Challenges Impede Monitoring of Terrorists' Use of Alternative 
Financing Mechanisms:

The U.S. government faces challenges in monitoring terrorists' use of 
alternative financing mechanisms, a few of which include accessibility 
to networks, the adaptability of terrorists, and competing priorities 
within the U.S. government.[Footnote 51] We recognize the inherent 
difficulty in monitoring terrorists' use of alternative financing 
mechanisms and highlight three key challenges in this report. First, 
accessing the networks through which alternative financing mechanisms 
operate is difficult for U.S. authorities, because such systems are 
close knit and nontransparent. Second, the adaptable nature of 
terrorist groups can hinder authorities' efforts to target industries 
and systems vulnerable to terrorists' use. Finally, when monitoring 
alternative financing mechanisms, U.S. agencies face competing 
priorities that may present challenges for utilizing and enforcing 
existing laws and regulations or fully implementing strategic efforts.

Accessing Terrorists' Close-knit, Nontransparent Financing Networks 
Presents Challenges for U.S. Law Enforcement:

The difficulty of accessing the networks through which alternative 
financing mechanisms operate represents a significant challenge for 
U.S. efforts to monitor terrorists' use of such mechanisms. In 
particular, these networks are difficult to access because they are 
close knit and based on trust. Informal banking systems, the diamond 
industry, and organized crime networks such as those that smuggle 
cigarettes and drugs are examples of alternative financing mechanisms 
that share these common factors. Similarly, terrorist organizations 
such as al Qaeda and Hizballah are close knit and difficult to 
penetrate. The closeness and high degree of trust between parties to 
terrorist financing networks are often based on long-standing ethnic, 
family, religious, or organized criminal ties. According to officials 
from U.S. law enforcement and the Treasury, investigators who seek to 
monitor such networks rely on developing inside sources of information, 
but the high degree of trust within the networks poses challenges for 
recruiting informants and conducting undercover operations. Law 
enforcement and the Treasury also report that language and cultural 
barriers can increase the difficulty of accessing such networks by 
impeding communication between government officials and parties to the 
networks.

Nontransparency in many of these alternative financing mechanisms poses 
another challenge to U.S. law enforcement's ability to access and 
monitor terrorists' use of them. One component of this nontransparency 
is lacking or indecipherable transaction records. While officials 
report that transaction records in the formal banking sector have been 
critical to their ability to freeze terrorists' assets, the lack of a 
paper trail created by alternative financing mechanisms limits 
investigators' ability to track and apprehend terrorist financiers. In 
one case, DEA pursued drug smugglers with suspected terrorist links who 
used hawala to transfer their profits to Lebanon. However, the 
indecipherable records of the hawala transactions to Lebanon impeded 
DEA's ability to trace the money once it reached Lebanon. As a result, 
DEA was not able to ascertain if the smugglers were providing material 
support to terrorists.

In addition to the lack of a paper trail, key trade data and 
accountability measures for industries vulnerable to terrorist 
financing can be poor or nonexistent, contributing to this 
nontransparency. For example, international data on the diamond 
industry show that import, export, and production statistics often 
contain glaring inconsistencies.[Footnote 52] Comprehensive 
international trade data on the industry are not available in volume 
terms, even though volume data are a better indicator of true trade 
flows. These data flaws inhibit analysts' ability to find patterns and 
anomalies that could reveal criminal smuggling of the diamonds, 
including for terrorist financing. Further, as we previously reported, 
while a recent international initiative to curb trade in illicit 
diamonds, known as the Kimberley Process, incorporates some elements of 
increased transparency, critical shortcomings exist with regard to 
internal controls and monitoring.[Footnote 53]

Terrorists' Adaptability Hinders Efforts to Target High-risk Mechanisms 
of Terrorist Financing:

Terrorist organizations' adaptability can hinder U.S. law enforcement's 
efforts to target industries and mechanisms that are at a high risk for 
terrorist financing. According to law enforcement and researchers, once 
terrorists know that authorities are scrutinizing a mechanism they use 
to earn, move, or store assets, they may switch to an alternate 
industry, commodity, or fundraising scheme to avoid detection. 
According to a former intelligence official, in one case, terrorists 
who were counterfeiting household appliances switched to creating their 
own appliance brand when law enforcement began to scrutinize their 
activities. Analysts from the former Customs Service have identified 
various counterfeit goods including CDs, DVDs, and apparel as having a 
possible connection to terrorist financing.

Additionally, according to researchers, terrorist groups such as al 
Qaeda can exploit their geographically diffuse structure to move the 
location of their operations if they are notified that authorities are 
pursuing their financing activities in a particular location. The DOJ 
reports that the Director of the Pakistan office of the Benevolence 
International Foundation, an international charity whose U.S. Executive 
Director was indicted for supporting al Qaeda and other terrorist 
organizations,[Footnote 54] avoided a Pakistani intelligence 
investigation by moving to Afghanistan with the foundation's money and 
documents. Within the United States, geographic flexibility may also 
facilitate terrorist financing. For example, according to IRS 
investigators and researchers, terrorists may have moved their charity 
from one state to another and changed the charity's name to evade law 
enforcement.

This adaptability also presents challenges in monitoring terrorists' 
use of informal banking systems, such as hawala. The USA PATRIOT Act 
strengthened existing anti-money laundering laws by requiring that 
operators of informal banking systems register with FinCEN and obtain 
state licenses, where required under state law. The act also requires 
that informal banking systems report suspicious transactions to FinCEN 
and maintain anti-money laundering programs. However, officials and 
researchers report that these requirements are difficult to enforce, 
and it is likely that numerous small hawala operations remain 
unregistered and noncompliant with one or more of these requirements. 
Terrorists may have adapted to these new regulations by developing and 
maintaining relationships and conducting business with the hawala 
operators that remain underground, increasing the likelihood that their 
transactions will not be detected.

Competing Priorities Present Challenges for Monitoring of Alternative 
Financing Mechanisms:

Addressing competing priorities presents challenges for U.S. government 
agencies' efforts to monitor use of alternative financing mechanisms. 
Increased emphasis on combating terrorism and terrorist financing since 
the September 11 terrorist attacks has placed greater urgency on 
preexisting responsibilities for some agencies. New laws such as the 
USA PATRIOT Act are generally recognized as assisting U.S. law 
enforcement efforts but also increase the workload of agencies. While 
the FBI is the lead agency on terrorist financing investigations, all 
agencies have an inherent responsibility to aid in this effort. 
However, some agency officials noted that new tasks sometimes compete 
with traditional roles or increase workloads, creating a strain on 
their resources, which could slow the sharing of potentially useful 
information. As a result, agencies may fail to fully utilize existing 
laws or fully implement strategic efforts in a timely manner, as 
described below.

Oversight of Charities:

Competing priorities slowed IRS plans to take advantage of law enabling 
greater information-sharing with the states. Although the IRS told us 
in February 2002 that it had begun to develop a system to share data 
with the states for the oversight of charities as allowed by 
law,[Footnote 55] the IRS has not made this initiative a priority and 
has not developed and implemented this system. While neither the IRS's 
nor the states' primary goal is deterring terrorism, using data-sharing 
systems is even more important now, when feasible, in light of the 
charities cases involving terrorist financing. States have an important 
role in combating terrorist financing because states share overall 
oversight responsibility for charities with the IRS. Further, according 
to state officials, questionable charities tend to move from state to 
state to avoid detection. According to the President of the National 
Association of State Charitable Organizations, the system of proactive 
information-sharing discussed with us in 2002 (including final denials 
of applications, final revocations of tax-exempt status, and notices of 
a tax deficiency) could be very useful for states in identifying and 
shutting down suspect charities, including charities involving 
terrorist financing. This system would establish uniform procedures for 
sending information from the IRS to states, including information about 
charities that have misused their funds.

IRS officials attributed delays in fully developing and implementing 
the system to a number of factors, including competing priorities in 
the department and the desire to combine this effort with the potential 
for increased information-sharing that may be allowable under pending 
legislation.[Footnote 56] However, IRS officials agreed that they could 
have developed this system without passage of further legislation, and 
while they stated that they had begun to do so, as of July 31, 2003, 
when we concluded fieldwork, they had provided no evidence of work 
completed to date and had not specified a time frame for how and when 
implementation would be completed. Subsequently, on September 4, 2003, 
the IRS provided us with draft IRS procedures and draft guidelines for 
state charity officials. Officials said they were reviewing the drafts, 
and their proposed completion date for this information-sharing program 
is December 31, 2004. The IRS did not establish milestones for meeting 
the completion date and did not establish interim guidelines. The 
President of the National Association of State Charitable Organizations 
told us that if the issuance of guidelines for state charity officials 
were further delayed, then interim guidelines would be useful.

Anti-money Laundering Programs:

The extent of the workload created under the 2001 USA PATRIOT Act 
initially increased the amount of work required of FinCEN and may have 
slowed efforts to take full advantage of the act concerning the 
establishment of anti-money laundering programs. The information to be 
gained under the regulations, through financial institution 
registration and submission of required Suspicious Transaction Reports, 
was intended to be shared with law enforcement and intelligence 
analysts in their efforts to detect and deter terrorism. In October 
2002, FinCEN officials told us that they had insufficient resources to 
draft regulations required under the act and they had not decided how 
to prioritize the workload. According to the 2002 National Money 
Laundering Strategy issued by the Departments of the Treasury and 
Justice, the process was made more challenging by the fact that many of 
the new provisions imposed regulations on various sectors and financial 
institutions that were not previously subject to comprehensive anti-
money laundering regulations, such as automobile and boat dealers, pawn 
brokers, and dealers in precious metals, stones, or jewels. This meant 
that time and resources were needed to study and consult with law 
enforcement and industry leaders. FinCEN rules for dealers in precious 
metals, stones, or jewels were proposed on February 21, 2003, and have 
not been finalized.

National Money Laundering Strategy:

Implementation of the 2002 National Money Laundering Strategy, which 
ostensibly directs the U.S. government's resources against money 
laundering and terrorist financing, has proven to be challenging 
partially owing to the number of competing priorities. The 2002 
strategy states that the U.S. government has moved aggressively to 
attack terrorist financing by refocusing its ongoing anti-money 
laundering efforts and acknowledges the larger burden placed on 
agencies owing to provisions of the USA PATRIOT Act. The 2002 strategy 
contains 19 objectives and 50 priorities but does not assign resources 
to these priorities based on a risk or threat assessment. Although the 
Secretary of the Treasury and the Attorney General issued the annual 
strategy, Justice officials, including FBI officials, told us that the 
strategy contained more priorities than could be realistically 
accomplished, and said that it did not affect how they set priorities 
or aligned resources to address terrorist financing. Treasury officials 
said resource constraints and competing priorities were the primary 
reasons why strategy initiatives, including those related to 
alternative financing mechanisms, were not met or were completed later 
than expected. Moreover, although the 2003 National Money Laundering 
Strategy was to be issued in February 2003,[Footnote 57] according to 
Treasury officials, as of July 31, 2003, the new strategy had not been 
published owing to the demands involved in the creation of DHS. At the 
conclusion of our review, Treasury officials told us that the Secretary 
of DHS would be added as a signatory to the 2003 National Money 
Laundering Strategy. However, subsequently, when reviewing the draft of 
this report, Treasury, DOJ, and DHS officials told us that the 
Secretary of the DHS would not be a signatory to the 2003 National 
Money Laundering Strategy.

Conclusions:

Efforts to disrupt terrorists' ability to fund their operations may not 
succeed if they focus solely on the formal banking or mainstream 
financial sector. To form a viable strategy, the U.S. government and 
others face challenges in understanding the nature and extent of 
terrorists' use of alternative financing mechanisms and in monitoring 
these and emerging mechanisms. While we recognize that the full extent 
of criminal activity cannot be determined, information can be 
systematically collected and synthesized to provide a useful gauge. We 
recognize that such analyses are difficult, but without an attempt to 
do so, information about terrorists' usage and potential usage remains 
unknown, leaving vulnerabilities for terrorists to exploit. Since 
current FBI systems do not allow for such data collection and 
synthesis, linkages, patterns, and emerging trends may not be 
effectively identified and, thus, resources may not be focused on the 
most significant mechanisms. Further, without rigorous assessments of 
high-risk industries and systems, critical information may remain 
unidentified or unexplored, leaving such industries and systems 
vulnerable to exploitation by terrorists. Without good data and 
analysis, leading to viable threat assessments and strategies, U.S. 
government officials cannot make good decisions among competing 
priorities and the resources to address them.

Recommendations for Executive Action:

To establish a basis for an informed strategy to focus resources on the 
most significant mechanisms that terrorists use to finance their 
activities, we recommend that the Director of the FBI, in consultation 
with relevant U.S. government agencies, systematically collect and 
analyze information involving terrorists' use of alternative financing 
mechanisms.

Moreover, to create a basis for an informed strategy for determining 
how money is being moved or value is being transferred via the trade in 
precious stones and commodities, we recommend that the Secretary of the 
Treasury and the U.S. Attorney General produce a report on this 
subject, fulfilling their overdue action item under the 2002 National 
Money Laundering Strategy. Such a report should be based on up-to-date 
law enforcement investigations of links between precious stones and 
commodity trading and the funding of terrorist groups, as required 
under the strategy.

Finally, to improve the oversight of charities, leading to the possible 
disruption of terrorist financing, we recommend that the Commissioner 
of the IRS, in consultation with state charity officials, establish 
interim IRS procedures and state charity official guidelines, as well 
as set milestones and assign resources for developing and implementing 
both, to regularly share data on charities as allowed by federal law.

Agency Comments and Our Evaluation:

We provided draft copies of this report to the following agencies for 
review: the Department of Justice, the Department of the Treasury, the 
Internal Revenue Service, the Department of Homeland Security and the 
Department of State. We received formal comments from the Treasury and 
IRS (see apps. II and III). We received technical comments from DOJ, 
DHS, and State, which we incorporated in the report as appropriate.

The DOJ did not formally respond to our recommendation that the 
Director of the FBI, in consultation with relevant U.S. government 
agencies, systematically collect and analyze information involving 
terrorists' use of alternative financing mechanisms. However, in DOJ's 
technical comments, they agreed that the FBI does not systematically 
collect and analyze such information, but they did not specifically 
agree or disagree with our recommendation. DOJ commented that it 
designates sources of funding in its terrorist financing cases, but it 
does not initiate or organize investigations on an industrywide basis 
or as a result of the type of commodity used or particular means of 
transfer. Additionally, DOJ suggested that the effort might more 
appropriately be a function of the Treasury based on Treasury's prior 
work on alternative financing mechanisms. However, according to FBI 
TFOS, their mission is to centralize and coordinate all terrorist 
financing investigations. As stated in this report, TFOS officials said 
that they and the DOJ Counterterrorism Section have already initiated a 
number of data mining and data link analysis initiatives to identify 
terrorist-related financing activities focusing on formal financing 
systems, but not alternative financing mechanisms. Further, TFOS 
officials said they plan to evaluate the feasibility of adding a 
separate designation for terrorist financing in their data system 
according to the source of funding. We continue to believe the FBI 
should work in consultation with relevant U.S. government agencies to 
systematically collect and analyze information involving terrorists' 
use of alternative financing mechanisms, which would include 
strategizing with and engaging the expertise of other agencies such as 
Treasury and DHS, among others.

In response to our recommendation that the Secretary of the Treasury 
and the U.S. Attorney General produce a planned report on precious 
stones and commodities, the Department of the Treasury responded that 
the report would be issued as an appendix to the 2003 National Money 
Laundering Strategy. However, the strategy was to be issued in February 
2003 and had not been issued as of our receipt of Treasury's comments 
on October 29, 2003. Further, the Treasury did not address whether 
their report would include up-to-date information from law enforcement 
investigations of links between precious stones and commodity trading 
and the funding of terrorist groups, as required under the strategy. 
The Department of Justice did not comment on this recommendation. We 
continue to recommend that their report be based on up-to-date law 
enforcement investigations given the conflicting views and the lack of 
comprehensive reporting on terrorists' use of precious stones and 
commodities.

The IRS agreed with our overall recommendation to establish IRS 
procedures and state charity official guidelines to regularly share 
data on charities as allowed by federal law. Although IRS told us at 
the conclusion of our fieldwork that they planned to establish this 
information-sharing program by December 31, 2004, in response to our 
draft report and recommendation, the IRS committed to expediting its 
efforts by one year, having procedures in place by the end of calendar 
year 2003. Subsequent to our fieldwork, the IRS exhibited progress by 
producing draft procedures and guidelines. However, the IRS did not 
address our recommendation to establish milestones and assign resources 
to meet the target date or interim guidelines should they miss the 2003 
target date. Given the complexity and time needed to complete the 
effort, as described by the IRS, we continue to recommend that the IRS 
establish milestones and assign resources to ensure that it meets its 
new target date. We also continue to recommend that IRS establish 
interim procedures and guidance should the IRS not meet its target 
date.

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the Attorney 
General, the Secretary of Homeland Security, the Secretary of State, 
the Secretary of the Treasury, the Commissioner of Internal Revenue, 
and interested congressional committees. We also will make copies 
available to others upon request. In addition, the report will be 
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call 
me at (202) 512-4128. Other contacts and staff acknowledgments are 
listed in appendix IV.

Loren Yager: 
Director, International Affairs and Trade:

[End of section]

Appendix I: Objectives, Scope, and Methodology:

The Ranking Minority Member of the Senate Committee on Governmental 
Affairs' Subcommittee on Oversight of Government Management, the 
Federal Workforce and the District of Columbia and the Chairman of the 
Senate Caucus on International Narcotics Control asked us to assess (1) 
the nature of terrorists' use of key alternative financing mechanisms 
for earning, moving, and storing terrorists' assets; (2) what is known 
about the extent of terrorists' use of alternative financing 
mechanisms; and (3) the challenges that the U.S. government faces in 
monitoring terrorists' use of alternative financing mechanisms.

To determine the nature of terrorists' use of some key alternative 
financing mechanisms for earning, moving, and storing assets, we 
reviewed past GAO work, studies, analyses, and other documents prepared 
by experts from U.S. agencies, international organizations, and other 
groups. We also interviewed officials of the U.S. government, 
international entities, foreign governments, industry, and nonprofit 
groups, as well as representatives from academia and research 
institutions. Our scope and methodology were limited by the lack of 
complete access to sensitive information and documentation. In cases 
where little documentation was provided and views conflicted, we 
corroborated information to the extent possible and noted the 
conflicting views.

We reviewed available documentation and interviewed officials from the 
following U.S. departments and agencies:

* the Department of Justice (Criminal Division; Federal Bureau of 
Investigation; Bureau of Alcohol, Tobacco, Firearms, and Explosives; 
Drug Enforcement Administration);

* the Department of the Treasury (Executive Office of Terrorist 
Financing and Financial Crime, Office of Foreign Assets Control, 
Financial Crimes Enforcement Network, Internal Revenue Service (IRS), 
and the Office of International Affairs);

* the Department of Homeland Security (Bureau of Immigration and 
Customs Enforcement);

* the Department of State (Office of the Coordinator for 
Counterterrorism, Bureau of International Narcotics and Law Enforcement 
Affairs, and Bureau of Economic and Business Affairs);

* the Department of Defense (Office of the Secretary of Defense, Office 
of Naval Intelligence, Defense Intelligence Agency);

* the Central Intelligence Agency;

* the Congressional Research Service;

* the U.S. Mission to the United Nations;

* the U.S. Embassy in Belgium (political and economic officers, 
Department of Homeland Security (Customs), Drug Enforcement 
Administration, Federal Bureau of Investigation, Defense);

* the U.S. Embassy in France (Department of Homeland Security 
(Customs), Federal Bureau of Investigation);

* the U.S. Mission to the European Union; and:

* U.S. representatives to INTERPOL.

We also reviewed and assessed available documentation and interviewed 
officials from the following international entities:

* the United Nations;

* INTERPOL;

* the Financial Action Task Force on Money Laundering;

* the World Customs Organization;

* the European Union;

* the Charities Commission on England and Wales; and:

* the Supreme Headquarters Allied Powers Europe (one of the North 
Atlantic Treaty Organization's military commands).

Additionally, we interviewed officials from Belgian law enforcement, 
the Federal Prosecutor's Office, and the Ministry of Foreign Affairs, 
Foreign Trade and International Cooperation. We also interviewed 
experts from India and Pakistan on hawala systems. We interviewed the 
Chief Prosecutor and Chief Investigator for the United Nations Special 
Court for Sierra Leone. Moreover, we reviewed studies and analyses and 
interviewed officials from industry, nonprofit groups, academia, the 
media, and research institutions such as the Belgian Diamond High 
Council, the Phillip Morris Company, Global Witness, the International 
Peace Information Service, Council on Foreign Relations, Business 
Exposure Reduction Group, the Washington Institute for Near East 
Policy, and the Investigative Project, among others.

To determine what is known about the extent of terrorists' use of 
alternative financing mechanisms, we reviewed studies, analyses, and 
other documents and interviewed officials from the U.S. government, 
international entities, foreign governments, industry, nonprofit 
groups, academia, and research institutions. We attended and reviewed 
briefings from the Federal Bureau of Investigation and the U.S. Customs 
Service (now part of the Department of Homeland Security) on their data 
collection, databases, and analysis methods and discussed with them 
what their systems could and could not do. We were limited by the lack 
of complete access to sensitive information and by the lack of 
available and reliable data to determine the extent of terrorists' use 
of alternative financing mechanisms. Our reporting on the current FBI 
data collection and analysis methods was curtailed by the Department of 
Justice due to sensitivity concerns. We also discussed studies 
completed and expected from the Departments of the Treasury and Justice 
as required under the 2002 National Money Laundering Strategy with 
officials from these departments.

To determine challenges that the U.S. government faces in monitoring 
terrorists' use of alternative financing mechanisms, we reviewed past 
GAO work and documents from U.S. and foreign governments, industry, and 
international entities including strategies, such as the National Money 
Laundering Strategy; laws, regulations, rules, policies, procedures, 
and actions; and studies. For example, we analyzed federal and state 
tax laws pertaining to the oversight of charitable organizations, 
including reviewing Internal Revenue Code section 6104 on information-
sharing between IRS and state regulators. Further, we interviewed 
officials from these organizations to corroborate analysis and 
documentary evidence. We also interviewed officials from the National 
Association of State Charitable Organizations and state Attorneys 
General Offices from California, New York, Pennsylvania, and Texas to 
identify challenges to deterring the use of charitable organizations in 
terrorist financing. According to the President of the National 
Association of State Charitable Organizations, California, New York and 
Pennsylvania are heavily regulated states while Texas is not. 
Additionally, we reviewed FinCEN issuance of rules and regulations as 
allowed under the USA PATRIOT Act. Further, we assessed and obtained 
views on competing priorities involved in implementing the 2002 
National Money Laundering Strategy.

We conducted our fieldwork in Washington, D.C., and New York, N.Y.; 
Brussels and Antwerp, Belgium; and Paris and Lyon, France. We performed 
our work from August 2002 through July 2003 in accordance with 
generally accepted government auditing standards.

[End of section]

Appendix II: Comments from the Department of the Treasury:

Note: GAO comments supplementing those in the report text appear at the 
end of this appendix.

DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220:

October 29, 2003:

Mr. Loren Yager:

Director, International Affairs and Trade 
United States General Accounting Office 
Washington, D.C. 20548:

Dear Mr. Yager:

The Department of the Treasury greatly appreciates the opportunity to 
review and comment upon the GAO's report: "Terrorist Financing: U.S. 
Agencies Should Systematically Assess Terrorists' Use of Alternative 
Financing Mechanisms." Overall, 
we believe the report does a very good job of assimilating a wide 
variety of information and explaining the complexity of this issue. As 
reflected below, we have several comments, and we would appreciate the 
opportunity to meet with GAO staff once more fully to explain our 
concerns.

Our comments that relate to the Report as a whole are as follows:

The report consistently speaks in terms of terrorists "earning" funds. 
We request that the word "earn" be changed to "raise" throughout this 
report. The concepts differ, especially in the area of charities. The 
term "earn" means that one receives something as a return for effort 
given or services rendered. The term "raise" means to gather, or 
collect, something for a purpose. Therefore, the term "raise" appears 
to be the more accurate term in the context of this report...

The other concepts of "move" and "store" are useful in this report, 
although one could argue for a "use" category as well, especially from 
the operational perspective. For example, buying the truck and the bomb 
"used" to perpetuate the terrorist acts are examples of "using" funds 
and result in transactions that can be identified and followed as 
well.

Page two of the report mentions that the GAO will specifically address 
coordination of U.S. and international efforts abroad to deter 
terrorist's use of alternative financing mechanisms in a subsequent 
report. Treasury stands ready to provide comprehensive material to the 
GAO for this purpose. One of the primary missions of Treasury's 
Executive Office for Terrorist Financing and Financial Crimes (EOTFFC) 
is representing the U.S. in international bodies dedicated to fighting 
terrorist financing and money laundering.

For example, Treasury's leadership role in international bodies such as 
the Financial Action Task Force (FATF) has led to the creation of more 
expansive and stringent anti-money laundering and counter-terrorist 
financing international standards and best practices. These standards 
directly relate to alternative financing mechanisms mentioned in your 
report such as charities, alternative remittance systems (e.g., 
hawala), and dealers in precious metals and stones. Through our 
efforts, we have created standards and best practices guidelines on 
regulating charities and alternative remittance systems. In addition, 
dealers in precious metals and stones are defined as non-financial 
businesses and are now required to implement customer due diligence, 
record keeping and suspicious transaction reporting requirements.

Finally, in order to diminish the attractiveness of alternative 
mechanisms, the Treasury Department has undertaken a series of 
bilateral and multilateral initiatives focused on channeling 
remittances through the formal financial systems. These initiatives are 
designed to heighten international attention on the market incentives 
that drive legitimate customers to use informal remittance channels and 
to address structural and other impediments in the formal financial 
system that may prevent the provision of efficient and accessible 
remittance services.

Our comments on specific portions of the Report are as follows:

Table 1 on Key U.S. Government Entities:

The following changes are requested:

The role of the Executive Office of (change to "for") Terrorist 
Financing and Financial Crimes should be changed to the following: 
"Works domestically and internationally to preserve and protect the 
integrity of the financial system and the economic and physical safety 
of America. Ensures that all possible diplomatic, policy, and strategic 
steps are taken to prevent the corruption of the financial system and 
to prevent terrorism and other financial crimes.":

Regarding the role of the Financial Crimes Enforcement Network 
(FinCEN), the following statement should be added to their role: 
"Administers the Bank Secrecy Act (B SA).":

The role of the Internal Revenue Service CI in the anti-terrorist 
financing arena is much broader than merely supporting investigations 
of charities. We request that the language describing the IRS role be 
changed to the following: "Identifies cases that might lead to 
terrorist connections, and supports investigations of terrorist 
financing involving all methodologies, including money remitters, 
bulk cash movements and charities, described in this report.":

We also request that Treasury's Office of the General Counsel be added 
to the list of relevant offices within Treasury. Its current role, 
which may change in the near future, is defined as follows: "Chairs 
Policy Coordination Committee (PCC) for Terrorist Financing. 
Coordinates U.S. government actions regarding implementation of, and 
imposition of economic sanctions under, Executive Order 13224 to with 
respect to the freezing of terrorist-related assets.":

Report on Trade Based Monev Laundering in Terrorist Financin:

Throughout the report, reference is made that the Departments of the 
Treasury and Justice have not yet produced a planned report, which was 
to form the basis of a strategy to address how money is moved or value 
transferred via trade in precious stones and commodities. As stated in 
our interviews, the said report is contained in an Appendix to the 2003 
National Money Laundering Strategy (NMLS) which is being transmitted to 
Congress shortly.

FinCEN report to Congress on Informal Value Transfer Systems:

On page 20 of the draft GAO report, a paragraph mentions FinCEN's 
report to Congress on Informal Value Transfer Systems (IVTS). The 
comments there appear to expand the scope of the report beyond what was 
required at the time. Thus, the comments about the IVTS report are 
inaccurate on two points. First, the report under Section 359 of the 
PATRIOT Act was not intended to discuss use of precious stones and 
commodities. The legislative requirement was first to evaluate the risk 
posed by hawala-type IVTS in moving monetary value into, out of or 
within the United States. Section 359 asked that the FinCEN report 
comment on the need for additional legislation, including whether 
existing thresholds for reporting suspicious transactions should be 
changed. No requirement --express or implied --to look at commodities 
or precious stones in the IVTS context was made, during FinCEN's 
discussions with congressional staff when Section 359 was being 
drafted, nor at any time during the research/drafting process. Second, 
the report did not discuss terrorist use of IVTS because there was no 
direct evidence that terrorists had used the system in the U.S. (Use in 
other criminal activity was found and was discussed in the report.)	
Therefore, we request that the text of that paragraph be changed to the 
following language:

"Further, a Treasury report to Congress on informal value transfer 
systems, required under the USA PATRIOT Act, while describing informal 
banking systems and related regulations, as required, did not discuss 
terrorist use of such systems and did not include a review of the 
potential use of precious stones and commodities in such systems. 
Further, Treasury issued a report to Congress evaluating the risk posed 
by hawala-type Informal Value Transfer Systems in moving monetary value 
into, out of or within the U.S. and to provide comment on the need for 
additional regulations to address any such risk, as required under the 
USA PATRIOT Act.":

Anti-Money Laundering Programs/Regulations:

Enclosed with these comments is a Summary of the Anti-Money Laundering 
Provisions of the USA PATRIOT Act and the steps taken to implement 
them. This summary is also contained as an Appendix to the 2003 NMLS. 
In order to reflect accurately the progress made on imposing 
regulations on various sectors, the GAO may wish to include this 
summary in its report.

On page 24, please delete the following sentence: "In November 2002, 
FinCEN officials told us that they had insufficient resources to draft 
regulations required under the act and they had not decided how to 
prioritize the workload." This statement might have been taken out of 
context and was not directly related to the regulatory requirements. 
FinCEN has met most of the USA Patriot Act deadlines. On page 24, the 
last sentence of the paragraph on Anti-Money Laundering Programs should 
be changed to the following:

"This meant that time and resources were needed to study and consult 
with law enforcement and industry leaders. FinCEN rules concerning 
anti-money-laundering programs for money service businesses, which 
include hawalas, were issued in an interim final status on April 29, 
2002, and remained open for comment. The comment period closed 30 days 
after the issuance of the interim final rule, on May 29, 2002. All 
financial institutions subject to rules were required to be in full 
compliance within 90 days of the interim final rule. FinCEN rules for 
dealers in precious metals, stones, or jewels were proposed on February 
21, 2003, and have not been finalized.":

Thank you for the opportunity to comment on the draft report. We look 
forward to meeting with you again and continuing to work with you on 
this important issue.

Sincerely: 

Juan C. Zarate:

Deputy Assistant Secretary:

Executive Office for Terrorist Financing and Financial Crimes:

Signed by Juan C. Zarate: 

Enclosure:

GAO Comments:

1. The term "earn" more fully captures the criminal effort involved in 
the range of alternative terrorist financing mechanisms.

2. While the use of terrorist funding may provide transactions that can 
be investigated, the scope of this review focused on how terrorists 
earn, move, and store their assets. The final use of terrorist funding 
is not relevant in the context of this report.

3. We amended the description of the Executive Office for Terrorist 
Financing to incorporate additional information provided. The 
description was edited in a manner consistent with those of the other 
agencies in the table and it captures both the information provided in 
the Executive Office's Mission Statement as well as the agency 
comments.

4. We amended the description of the Financial Crimes Enforcement 
Network in Table 1 to include its role in administering the Bank 
Secrecy Act.

5. The description used was obtained from IRS Criminal Investigation 
and is consistent with the format used for other agencies.

6. We incorporated the description of the Treasury's Office of the 
General Counsel in Table 1.

7. We respond to this comment on page 28.

8. We agree that the USA PATRIOT Act did not specifically require that 
the Department of the Treasury report to Congress on informal value 
transfer systems include a discussion of precious stones and 
commodities. While a discussion of precious stones and commodities was 
not specifically required under the USA PATRIOT Act, the Treasury 
report notes that there is a need for further research, particularly 
with regard to understanding the range of mechanisms associated with 
informal banking systems, including the use of gold and precious gems 
in hawala transactions, among others. We modified our report, 
accordingly.

9. The Department of the Treasury's comments state that their report to 
Congress on informal value transfer systems did not discuss terrorists' 
use of these systems because there was no direct evidence that 
terrorists had used these systems in the United States. However, the 
Treasury report states that "these [informal value transfer] systems 
have been used to facilitate the financing of terrorism" and the USA 
PATRIOT Act requirement for the report addresses the transfer of money 
both domestically and internationally. The Treasury report provides no 
further discussion on the link between terrorist financing and these 
systems.

10. The sentence is characterized accurately. The context of the 
discussion was the development of regulations required under the USA 
PATRIOT Act.

11. We have omitted the example concerning the timeline for finalizing 
anti-money laundering program rules for money service businesses due to 
conflicting information presented by FinCEN during our review and the 
Department of the Treasury's comments.

[End of section]

Appendix III: Comments from the Internal Revenue Service:

DEPARTMENT OF THE TREASURY 
INTERNAL REVENUE SERVICE 
WASHINGTON, D.C. 20224:

COMMISSIONER:

October 28, 2003:

Mr. Loren Yager:

Director, International Affairs and Trade 
United States General Accounting Office Washington, D.C. 20548:

Dear Mr. Yager:

I am responding to your report entitled TERRORIST FINANCING: United 
States Agencies Should Systematically Assess Terrorists' Use of 
Alternative Financing Mechanisms (GAO-04-163). The Internal Revenue 
Service is very committed to shutting down the stream of terrorist 
funding, and we consider it one of our highest priorities.

Although the Federal Bureau of Investigation (FBI) is designated as the 
primary agency in terrorist financing matters, our Criminal 
Investigation Division (CI) special agents have led this effort in a 
number of ways and are an integral part of the Joint Terrorism Task 
Forces (JTTF). These JTTF team members bring invaluable assistance from 
their many years of experience working complex financial 
investigations. CI also furnishes forensic financial accountant 
expertise in several overseas assignments, often alongside the FBI.	CI 
participates in every major terrorist financing investigation, many of 
which involve violations of the Internal Revenue Code and related 
offenses. CI also assists the Treasury Department in efforts to locate 
and freeze terrorist funds and repatriate stolen Iraqi assets.

I agree that law enforcement agencies should have a better approach to 
assessing the use of alternative financing mechanisms. The GAO findings 
regarding the misuse of charities to raise funds and the transmission 
of illegal proceeds are consistent with our experience in this area. 
The report was well balanced in setting forth the significant 
challenges to increasing law enforcement's tracking of terrorism 
alternative financing. The IRS has long dealt with similar obstacles in 
the trade-based part of the underground economy and in our 
investigations of the laundering of illegal proceeds.

Criminal Investigation has been proactively educating the civil 
functions of the IRS regarding the various methods of terrorist 
funding. Specifically, CI is working with the IRS Tax Exempt and 
Government Entities (TE/GE) Division to educate the auditors about the 
use of charitable organizations by terrorist organizations. CI agents 
taught numerous TE/GE training seminars. Recently, CI and TE/GE jointly 
made presentations to financial analysts from both the CIA and FBI on 
issues regarding the procedure for revocation of exempt status and 
indicators of potential misuse of 
charitable organizations. We are also working to obtain additional 
security clearances for TE/GE personnel so that they may continue to 
actively participate and assist in terrorist financing investigations.

I also agree that the IRS should expedite the process of establishing 
procedures and guidelines to share data on charities with states as 
allowed by federal law. Let me assure you that the lack of formal 
procedures has not hampered our continuing work with the states. We 
have a good existing partnership with state charity officials and have 
always shared information as permitted by law on important topics.	In 
the area of terrorist financing for example, we have shared with the 
National Association of State Charities Officials the list of 
organizations designated as terrorist organizations by Executive Order. 
We have also briefed their membership on our activities in this area. 
We will continue to share important information as necessary.

As you note, the GAO issued an April 30, 2002 report, Tax-Exempt 
Organizations-Improvements Possible in Public, IRS, and State Oversight 
of Charities (GAO-02-526), in which it recommended that IRS develop, in 
consultation with state charity officials, procedures to regularly 
share IRS data with states as allowed by federal law.

An IRS team has developed a program of information sharing as provided 
by section 6104(c) of the Internal Revenue Code. The team drafted 
procedures and guidelines for information sharing with the states that 
will appear in the Internal Revenue Manual (IRM). This draft was shared 
with the National Association of State Charities Officials, and we are 
in receipt of their comments. I am confident that we will have formal 
procedures in place by the end of this calendar year.

As you are aware, pending legislation (e.g., S. 476, the Charity Aid, 
Recovery, and Empowerment Act of 2003) would increase available 
information sharing with the states. If passed, we will take 
expeditious steps to implement the provisions of that legislation.

If you have any questions, or if you would like to discuss this 
response in more detail, please contact Vicki Duane, Deputy Director, 
Operations Policy and Support, at 202-622-6547.

Sincerely,

Signed for: 

Mark W. Everson:

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Elizabeth Sirois (202) 512-8989 Kathleen Monahan (415) 904-2237:

Staff Acknowledgments:

In addition to those individuals named above, Kate Blumenreich, Tracy 
Guerrero, Janet Lewis, Kendall Schaefer, Jenny Wong, Mark Dowling, Rona 
Mendelsohn, and Reid Lowe made key contributions to this report.

FOOTNOTES

[1] Pub. L. No. 107-56 (Oct. 26, 2001).

[2] Terrorists are individuals who are part of international 
organizations with the will and means to target the United States or 
U.S. interests abroad with violent or dangerous acts calculated to 
intimidate, coerce, or retaliate against government conduct (see 18 
U.S.C. 2331(1), 18 U.S.C. 2332b(g)(5)). 

[3] The use of bulk cash refers to smuggling currency, travelers 
checks, or similar instruments across borders by means of a courier 
rather than through a formal financial system. 

[4] According to the 2002 National Money Laundering Strategy, informal 
value transfer systems (referred to here as "informal banking systems") 
are known by a variety of names reflecting ethnic and national origins 
predating the emergence of modern banking and other financial 
institutions. Included, among others, are systems such as hawala or 
hundi, terms commonly used when referring to Indian, Pakistani, and 
Middle Eastern systems. These systems provide mechanisms for the 
remittance of currency or other forms of monetary value--most commonly 
gold--without physical transportation or use of contemporary monetary 
instruments. 

[5] Also at your request, we addressed U.S. domestic coordination 
efforts to deter terrorist financing under a separate report focusing 
on the National Money Laundering Strategy. See U.S. General Accounting 
Office, Combating Money Laundering: Opportunities Exist to Improve the 
National Strategy, GAO-03-813 (Washington, D.C.: Sept. 26, 2003).

[6] See U.S. General Accounting Office, Tax-Exempt Organizations: 
Improvements Possible in Public, IRS, and State Oversight of Charities, 
GAO-02-526 (Washington, D.C.: Apr. 30, 2002).

[7] U.S. Department of State, Patterns of Global Terrorism 2002 
(Washington, D.C.: April 2003).

[8] We did not evaluate the adequacy or implementation of these 
strategies, with the exception of the 2002 National Money Laundering 
Strategy as it pertains to alternative financing mechanisms.

[9] U.S. Department of State, International Narcotics Control Strategy 
Report (Washington, D.C.: March 2003).

[10] Office of Homeland Security, the White House, President's National 
Security Strategy of the United States of America (Washington D.C.: 
July 2002).

[11] The White House, National Strategy for Combating Terrorism 
(Washington D.C.: February 2003).

[12] Pub. L. No. 107-197, Title II (June 25, 2002).

[13] See 18 U.S.C. 2339C(a)(1).

[14] The intelligence community includes the Office of the Director of 
Central Intelligence; the Central Intelligence Agency; the National 
Security Agency; the National Imagery and Mapping Agency; the National 
Reconnaissance Office; the Defense Intelligence Agency and other 
offices within the Department of Defense for the collection of 
specialized national intelligence through reconnaissance programs and 
the intelligence elements of the Army, the Navy, the Air Force, and the 
Marine Corps; the FBI; the Department of the Treasury; the Department 
of Energy; the State Department's Bureau of Intelligence and Research; 
and such other elements of any department or agency as may be 
designated by the President or jointly by the Director of Central 
Intelligence and the head of the department or agency concerned.

[15] These preexisting networks are based on ethnic, geographic, or 
criminal links, providing access to people with similar interests and 
to established financing structures founded on trust-based 
relationships and often lacking substantial formal documentation. 

[16] Although U.S. law enforcement agencies discussed some examples of 
terrorists' use of scams involving common household commodities and the 
illicit sales of a variety of counterfeit goods, with the exception of 
one public cigarette case, examples are not included in this report 
because, according to the FBI, the cases are still open and discussion 
may jeopardize investigations and prosecutions.

[17] The estimated 100 metric tons of cocaine that the U.S. government 
seizes each year could be worth as much as $10 billion to the drug 
trade. 

[18] U.S. General Accounting Office, Combating Terrorism: Interagency 
Framework and Agency Programs to Address the Overseas Threat, 
GAO-03-165 (Washington, D.C.: May 23, 2003).

[19] Southeast Asian terrorist organizations that have cells linked to 
al Qaeda were discovered in 2001 in Malaysia and Singapore, and their 
activities, movements, and connections traverse the entire region, but 
little information is available about their financing methods.

[20] In the United States, many states require the payment of an excise 
tax, a tax on the sale or manufacture of a commodity, usually a luxury 
item, on the sale of cigarettes. Some states require proof of payment 
in the form of tax stamps. 

[21] According to DOJ, the investigation also resulted in an additional 
22 convictions by plea bargain on related charges.

[22] The Phillip Morris Company estimates that the revenue loss to New 
York City from one shipping container of counterfeit cigarette sales is 
roughly $1.6 million.

[23] According to DOJ, it has issued indictments in five cases 
involving the misuse of a charitable organization to earn assets, move 
assets, or both. Additionally, the FBI has discussed two additional 
ongoing cases.

[24] In Holy Land Foundation v. Ashcroft, 219 F.Supp.2d 57, 75 (D.D.C. 
2002), aff'd, 333. F.3d 156 (D.C. Cir. 2003), the U.S. Court of Appeals 
for the District of Columbia Circuit found the evidence tying the Holy 
Land Foundation for Relief and Development to the terrorist 
organization Hamas to be substantial.

[25] Global Relief Foundation vs. Paul H. O'Neil, et al., 207 F. Supp. 
2d 779, U.S. District Court, Northern District of Illinois, Eastern 
Division, June 11, 2002.

[26] U.S. v. Enaam Arnaout, Case No. 02CR892, U.S. District Court, 
Northern District of Illinois, Eastern Division, April 2002.

[27] For example, according to an FBI press release, on August 13, 
2003, a New York diamond jeweler was indicted for conspiring to operate 
an unlicensed money remittance system (informal banking system). 
Prosecutors alleged that the system was to be used in a terrorist 
financial transaction involving the purchase of a shoulder-fired 
missile. 

[28] U.S. and international law enforcement officials, as well as 
academic researchers, have identified a variety of ethnically based 
informal banking systems that originated in China, India, Pakistan, 
Vietnam, and Somalia, among numerous others. Officials and researchers 
note that these informal banking systems generally predate formal 
banks, and that some groups may consider them more familiar and 
trustworthy than formal banks. 

[29] A Report to the Congress in Accordance with Section 359 of the 
Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism Act of 2001, Submitted by 
the Secretary of the U.S. Department of the Treasury, (Nov. 2002).

[30] According to DOJ, Al Barakaat operated a hybrid hawala in which 
its informal system interconnected with the formal banking system. 
Because Al Barakaat also used financial institutions, law enforcement 
was able to discover the transactions to Somalia by analyzing 
Suspicious Activity Reports generated by the banks pursuant to their 
obligations under the 1970 Bank Secrecy Act [Pub. L. No. 91-508, 84 
Stat. 1114 (1970) (codified as amended in 12 U.S.C. §§ 1829(b), 1951-
1959 (2000); 31 U.S.C. §§ 5311-5330 (2000)].

[31] Treasury did not report a time frame during which this money was 
channeled.

[32] Financial transparency reporting requires Currency and Monetary 
Instrument Reports, which obligates the filer to declare if he or she 
is transporting across the border $10,000 or more in cash or monetary 
instruments.

[33] Operation Oasis was established under the former U.S. Customs 
Service. The U.S. Customs Service was transferred to the Department of 
Homeland Security and its investigators were transferred to ICE.

[34] U.S. General Accounting Office, International Trade: Critical 
Issues Remain in Deterring Conflict Diamond Trade, GAO-02-678 
(Washington, D.C.: June 14, 2002). 

[35] According to the Congressional Research Service, a pound of 
diamonds in 2002 was worth around $225,000, compared with a pound of 
cash that was worth $45,000 and a pound of gold, which was worth 
$4,800.

[36] In August 2000, the United Nations and the government of Sierra 
Leone agreed to establish a Special Court for Sierra Leone to prosecute 
persons bearing responsibility for serious violations of international 
humanitarian law and Sierra Leonean law committed in the territory of 
Sierra Leone since November 1996. 

[37] Al Qaeda first set up diamond mining and trading companies during 
the 1990s in Kenya and Tanzania. Although these diamond-trading 
operations were not fully developed, they did provide some financial 
returns and expertise for involvement in diamond trading in Sierra 
Leone. 

[38] According to the DHS ICE, in a drug-trafficking sting operation in 
the jewelry district of New York, 11 individuals were indicted for 
money laundering by accepting more than $1 million cash in exchange for 
smelted gold items and diamonds they had reason to believe were going 
to be smuggled to South America.

[39] According to the 2002 National Money Laundering Strategy, the 
Black Market Peso Exchange, the largest known trade-based money 
laundering system in the Western hemisphere, is a system that converts 
and launders illicit drug proceeds from dollars to Columbian pesos. 
Typically, narcotics dealers sell Columbian drugs in the United States 
and receive U.S. dollars. The narcotics traffickers thereafter sell the 
U.S. currency to a Columbian black market peso broker's agent in the 
United States. In return for the dealer's U.S. currency deposit, the 
agent deposits the agreed-upon equivalent of Columbian pesos into the 
cartel's bank account in Columbia. At this point, the cartel has 
successfully converted its drug dollars into pesos, and the Columbian 
broker and his agent now assume the risk for integrating the drug 
dollars into the U.S. banking system. The broker funnels the money into 
financial markets by selling the dollars to Columbian importers, who 
then purchase U.S. goods that are often smuggled back into Columbia to 
avoid taxes and customs duties.

[40] False invoicing is a simple way of moving money across borders. 
For example, if a container of goods is worth $100,000, but is invoiced 
for $150,000, the subsequent payment of $150,000 will allow the 
movement of $50,000 to illicitly cross borders.

[41] United States vs. Benevolence International Foundation, Inc. and 
Enaam Arnaout, Case Number 02 Cr. 0414, United States District Court, 
Northern District of Illinois, Eastern Division, April 2002.

[42] GAO-02-678. 

[43] For example, in many of these countries, gold is commonly 
displayed in weddings, as a form of economic status, or to settle books 
in informal banking systems.

[44] According to the Treasury's Office of Foreign Assets Control, the 
United States had frozen $719,832 in al Qaeda assets as of July 31, 
2003.

[45] Once a U.S. law enforcement agency (for example, ATF, DEA, ICE, 
etc.) identifies a terrorist nexus in an investigation they are to 
notify the FBI. Information is to be shared through the FBI-led Joint 
Terrorism Task Forces in the field or the National Joint Terrorism Task 
Force in FBI headquarters. Agencies have representatives at each 
others' locations to facilitate information-sharing. 

[46] The FBI's Terrorist Financing Operations Section provides overall 
operational command to the interagency National Joint Terrorism Task 
Force at FBI headquarters and the Joint Terrorism Task Forces in the 
field that conduct terrorist financing investigations and operations. 

[47] Data mining is the process of extracting meaningful information 
from large databases. Once extracted, the information can be analyzed 
to reveal hidden patterns, trends, relationships, and correlations 
between the data. 

[48] According to the May 13, 2003, Memorandum of Agreement between the 
Department of Justice and the Department of Homeland Security 
Concerning Terrorist Financing Investigations, after June 30, 2003, OGQ 
no longer existed as a program name. DHS was to pursue terrorist 
financing investigations and operations solely through its 
participation in the FBI's National Joint Terrorism Task Force, the 
Joint Terrorism Task Forces, and the Terrorist Financing Operations 
Section.

[49] According to ICE's technical comments on our draft report, an 
artificial intelligence function is being developed for utilization in 
the NIIS program, but ICE did not provide evidence of its development 
or what it would accomplish regarding alternative financing mechanisms.

[50] Pub. L. No. 107-56, Sec. 359(d).

[51] As stated previously, issues concerning coordination and 
cooperation among U.S. government agencies and international entities 
abroad will be covered in a subsequent GAO report.

[52] Data inconsistencies may be attributed to various factors, 
including poor quality of data generated from many mining and trading 
nations, differences in how customs officials appraise shipments, 
industry practices such as selling goods on consignment or unloading 
stockpiles, false declarations by importers on the diamonds' origin, 
and smuggling.

[53] GAO-02-678. Our assessment of the Kimberley Process found that it 
lacked controls to ensure that it would be effective in stemming the 
flow of conflict diamonds. We recommended that the Secretary of State, 
in consultation with the relevant government agencies, work with 
Kimberley Process participants to develop better controls including a 
reasonable control environment, risk assessment, internal controls, 
information-sharing, and monitoring. Our recent follow-up work showed 
that these weaknesses remain and could be exploited by financiers of 
terrorism.

[54] On February 10, 2003, the U.S. Executive Director pled guilty to a 
racketeering conspiracy, admitting that he fraudulently solicited 
charitable organizations in order to provide financial assistance to 
persons engaged in violent activities overseas. According to DOJ, he 
was sentenced to 11 years in prison.

[55] The appropriate state officials can obtain details about the final 
denials of applications, final revocations of tax-exempt status, and 
notices of a tax deficiency under section 507, or chapter 41 or 42, 
under the Internal Revenue Code. However, IRS does not have a process 
to regularly share such data. See U.S. General Accounting Office, Tax-
Exempt Organizations: Improvement Possible in Public, IRS, and State 
Oversight of Charities, GAO-02-526 (Washington, D.C.: Apr. 30, 2002).

[56] S.476, the Charity Aid, Recovery, and Empowerment Act of 2003.

[57] The Money Laundering and Financial Crimes Strategy Act of 1998 
(Strategy Act, see Pub. L. No. 105-310, 112 Stat. 2941 codified as 31 
U.S.C. §§ 5340-42, 5351-55 (1998)) requires the President -acting 
through the Secretary of the Treasury and in consultation with the 
Attorney General and other relevant federal, state, and local law 
enforcement and regulatory officials -to develop and submit the annual 
National Money Laundering Strategy to Congress by February 1 of each 
year from 1999 through 2003. 

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