Funding terror.

• Author: Baradaran, Shima
• Position: Introduction through I. The Domestic and International War on Terror, p. 477-507

The events of September 11, 2001, forever changed the political and legal responses to terrorism. After more than ten years, two wars, numerous targeted military strikes, and significantly increased surveillance, we have not stopped the growth of al-Qaeda and other terrorist organizations. The War on Terror has involved more than military operations. To stop terrorism, it is imperative to cut off its funding stream. To this end, a number of nations have created financial laws that prohibit the formation of anonymous companies and monitor suspicious bank transfers. Though these laws have been touted as evidence that we are winning the War on Terror, this Article questions their efficacy. In particular, this Article demonstrates how easy it is to form a terrorist finance network and to exploit the impotence of these international and domestic financial regulations. The Article presents findings from the largest global, randomized controlled trial on this issue to date. In our experiment, we acted as customers seeking to form anonymous shell companies in a variety of scenarios resulting in either greater risk or greater reward. On the whole, forming an anonymous shell company is as easy as ever, despite increased regulations following September 11. The results are disconcerting and demonstrate that we are far from a world that is safe from terror.

INTRODUCTION I. THE DOMESTIC AND INTERNATIONAL WAR ON TERROR A. Financial Tools at Terrorists' Disposal 1. Money Laundering 2. Charities and Trusts 3. Shell Companies B. Defunding Terrorism: Domestic Efforts 1. U.S. Military, Security, and Intelligence Efforts 2. U.S. Financial Efforts C. Defunding Terrorism: International Efforts D. Remaining Domestic Challenges II. EXPERIMENTAL RESULTS A. Design Study: Finding Providers, Composing Treatments 1. Placebo 2. Terrorism Treatment 3. FATF and IRS Treatments B. Coding the Responses 1. Compliance Coding 2. Random Assignment C. Results and Findings 1. Brief Summary of Compliance Rates 2. Complete Discussion of Findings a. Overall International Know-Your-Client Effectiveness b. Relative Compliance Rates Among Countries c. (In)Sensitivity to Terrorism Risks d. Effect of Additional Information: IRS e. Variation Among U.S. States III. THE FUTURE OF THE WAR ON FINANCIAL TERROR APPENDIX A. Placebo/Control B. Terrorism Treatment C. FATF Treatment D. IRS Treatment E. Response Emails 1. Indignant Response 2. Greedy Response 3. Compliant Response 4. Partially Compliant Response 5. Noncompliant Responses a. Response 1 b. Response 2 c. Response 3 F. Response Data INTRODUCTION

Financing--particularly, a secure financing network--is crucial for terror organizations. (1) To finance its international operations, al-Qaeda requires an estimated $30-550 million per year. (2) Establishing al-Qaeda's financing network was one of Osama bin Laden's earliest and most important accomplishments (3) because it provided millions in "steady and secure" income to the organization. (4) Not every act of terrorism, however, requires terrorist organizations to spend great sums of money. For instance, the September 11 attacks cost al-Qaeda approximately $400,000-5500,000, (5) but "[t]he London transit bombings on July 7, 2005, only cost about $15,000." (6) Because terrorists can accomplish enormously destructive attacks with very little money, a successful war on terror must reach deep into the financial heart of terrorism.

Though terror attacks are often inexpensive, the efforts to prevent them are not. To combat terrorism and drain the pipeline of funds, the United States has frozen al-Qaeda's U.S. assets (7) and spent more than $1.2 trillion since 9/11 on its major military and diplomatic operations abroad, as well as "medical care for Iraq and Afghan war veterans." (8) The overall costs of fighting terrorism have compounded the national deficit (9) and greatly impacted the financial markets. (10) One group of commentators has even called this fight the "three trillion dollar war." (11) This is not to mention the other costs of terrorism, including the cost to civil liberties of security measures. (12) Terrorism's financial impact reaches far beyond U.S. borders; other nations have also spent billions of dollars combating it. (13) The United Kingdom, for instance, spends an estimated 3.5 billion [pounds sterling] per year to fight terrorism. (14)

Though the United States has spent enormous sums to fight terrorism with its military might, many are concerned that it has not invested sufficient resources in cutting off the true lifeline of terrorism: its clandestine network of global financing. (15) As this Article examines in great detail, one of the most dangerous and accessible financial tools used by terrorists today is the anonymous shell company. (16) These companies allow terrorists to disguise their identities and covertly transfer funds--even within U.S. banks--toward illegal activities. Shell companies pose particularly vexing problems for law enforcement because there is often no way to trace them to individuals. (17) The only tangible component of a shell company may be a post office box; in other words, shell corporations are often "hollow" companies. (18) Shell corporations can serve some legitimate purposes, such as facilitating mergers, enabling international joint ventures, and serving as asset-holding companies. (19) However, because they are "hollow," they are commonly used as vehicles for corruption, money laundering, and, more recently, terrorism. Although many of these organizations seem harmless when they are created, posing as charities or legitimate businesses, they often become involved in illicit activities and frequently lead law enforcement investigations to dead ends. (20) In an effort to combat terrorist financing, policymakers have begun identifying vulnerabilities in financial institutions and the ways in which terrorists have exploited them. (21) New legislation has pushed for financial transparency as a way to avoid corruption and obstruct terrorist financing both within the United States and globally, (22) but the effectiveness of these efforts is debatable, given terrorist organizations' ability to adapt quickly. (23) While others have commented about how easy it is to form anonymous shell companies, (24) no study thus far has determined how effective domestic and international regulations have been at curbing their proliferation and use. (25)

This Article and the experiment we developed seek to fill this void and measure the effectiveness of domestic and international law at curbing the use of shell companies. Because the United States spends billions of dollars each year on counterterrorism, understanding the effectiveness of these efforts is crucial. (26) Measuring their effectiveness is increasingly difficult, and much of the rhetoric concerning successful U.S. intervention into the terrorism-financing network is simply political. (27) Policymakers often offer "perceptions of success" without providing data or even explaining their methodology. (28) This Article seeks to move the discussion forward by delivering extensive empirical data on the effectiveness of worldwide efforts to curb terrorist financing.

The Article is divided into three parts. Part I outlines the current financial tools at terrorists' disposal. It pays particular attention to anonymous shell companies and discusses the laws intended to stop the formation of such companies, their shortcomings...