Terrorism financing – what exactly is it?

Money laundering and terrorist financing – two sides of the same coin

Definition of money laundering

Money laundering is a process aimed at concealing the origin of funds. The funds originate from Drug trafficking or other illegal activities and are to be introduced into the legal economic cycle.

The aim of money laundering is to give illegally obtained money the appearance of legality without arousing suspicion. In Germany, there are specific laws designed to prevent such activities.

Anyone caught laundering money can be fined or imprisoned. Strict rules exist for banks and other businesses to ensure they do not unintentionally aid in money laundering.

Definition of terrorism financing

Terrorism financing means that someone intentionally provides or raises funds to support or enable terrorist offenses. This can include giving money to groups that are planning terrorist activities or directly contributing to the execution of such actions.

Financing such acts is illegal and is severely punished because it serves to promote or facilitate serious acts of violence such as bombings, kidnappings or attacks that can endanger human lives.

Differences between money laundering and terrorist financing

Purpose and origin of the money

The primary difference between money laundering and terrorist financing lies in their objectives. Money laundering deals with the integration of proceeds from illegal activities into the legal financial system in order to conceal the true origin of these funds.

In contrast, terrorist financing aims to provide financial resources for the planning and execution of terrorist activities.

These funds can come from both legal and illegal sources, which makes monitoring and combating them more difficult.

Use of funds

Another key difference lies in the final use of the financial resources. Money laundering often results in the personal enrichment of the individuals involved.

In contrast, in the case of terrorist financing, funds are used specifically to support or carry out terrorist actions in order to achieve political, social, or religious goals.

Similarities between money laundering and terrorist financing

Use of the financial system

Both money laundering and terrorist financing exploit the global financial system to achieve their goals. Both crimes employ complex methods to conceal their activities, making them a global challenge for monitoring and regulatory authorities.

International regulations

At the international level, both money laundering and terrorist financing are subject to strict legislation. Bodies such as the Financial Action Task Force (FATF) They establish guidelines that address both types of financial crime and set standards for prevention, detection, and prosecution. These guidelines have been recognized as binding by more than 200 jurisdictions and countries.[1].

Prevention and control strategies

Financial institutions worldwide are required to implement robust systems for detecting and reporting suspicious activity. These measures include KYC checks, monitoring of transactions and cooperation with legal authorities to effectively combat both money laundering and terrorist financing.

Terror prevention is a focus of BaFin

According to the Money Laundering Act, the responsible bodies, such as banks, must examine and assess both the risks of money laundering and the risks of terrorist financing in their risk analyses.

Although these analyses often differentiate between money laundering and terrorist financing, the majority of the responsible authorities do not adequately address the issue of terrorist financing. They tend to treat it superficially and do not fully focus on the specific risks that could affect their own institution. This is according to an article by BaFin.[2]

The FIUs-Report[3] The data from 2023 underlines this statement: Of the 337.186 suspicious activity reports submitted, only 4.100 had a potential connection to terrorist financing, other state security-relevant crime, or sanctions.

Reports of money flows potentially linked to terrorist financing thus accounted for only 1% of suspicious activity reports. However, unlike reports related to money laundering, these cases are immediately investigated more closely. Because they pose a high risk, they receive particular attention and swift action is taken to initiate the necessary measures.

Terrorism and its impact on society

Obligations and regulations often leave a bitter aftertaste. For many who are subject to them, it means extra work and even more effort.

However, this work is extremely worthwhile, because it combats terrorism in the world.

Hardly any country is not threatened by terrorism or has not experienced terrorist attacks in the past. From large, well-known attacks like those of September 11, 2001, on the Twin Towers in New York, to the everyday attacks in regions like Syria or Afghanistan: Terror has a firm grip on our world.

According to Europol statistics, there have been over 1.200 terrorist attacks in the European Union in the last ten years. Over 7.500 arrests have been made in connection with these attacks.[4].

We also see the effects and consequences of terrorism in Germany: stricter security checks at airports and before events, thick concrete bollards at Christmas markets and city festivals – even if we have become accustomed to these things, the fight against terrorism must not stop.

How the EU fights terrorism

The European Union has initiated a number of measures.[5]to combat terrorism and its associated financing. These measures include both regulatory requirements and practical steps to secure member states and prevent future attacks.

Here is a summary of the most important points relating to the regulatory aspects focus:

• Financial regulation and control: The EU has taken measures to freeze terrorists' assets, tightened money laundering rules, and introduced new rules for reporting suspicious financial transactions in order to limit the financial resources available for terrorist activities.
• weapons controlStrict regulations for the possession and trade of weapons have been implemented, including a ban on certain semi-automatic weapons for civilian use and the introduction of regulations to improve the traceability of firearms and their components.
• Prevention and combating of radicalizationBy broadening the definition of terrorist offenses and establishing a specialized reporting center to combat online radicalization, the EU aims to prevent the recruitment and financing of terrorists and to combat the spread of extremist content on the internet.
• Improvement of international and interinstitutional cooperationIncreased efforts have been made to improve cooperation between EU Member States and international partners, including support for Europol and Eurojust, and increased exchange of information on terror suspects and terrorist activities.

How do terrorist organizations finance themselves?

To understand how to combat the financing of terrorism, one must first understand how terrorist organizations finance themselves.

Whether donations from non-profit or non-governmental organizations (NGOs), the use of shell companies, or the sale of valuable resources like ivory: the sources of funding are diverse and often difficult to trace. A large portion of the money also originates from other crimes such as bank robbery, smuggling, and human and drug trafficking.

Forbes Israel published a comprehensive article in 2018 on the ten largest terrorist organizations and their sources of funding.[6]

The world's most notorious terrorist organization, IS (Islamic State), finances itself through oil trafficking, looting, and kidnappings. Its revenues were estimated at 200 million US dollars per year in 2018.

Hezbollah is estimated by Forbes to be the world's richest terrorist organization, receiving around US$1,1 billion in annual revenue. An estimated US$800 million of this comes from Tehran; other sources of income include projects disguised as NGOs, real estate and car deals, and drug trafficking.

The graphic is from the “Transnational Security Report”[7] This shows the complex path of money flows from Europe to a terrorist organization. This process involves several stages, from the generation of funds to their use in the terrorist sphere:

1. Fundraising in Western Europe:

The funds are generated through illegal activities such as drug trafficking and credit card fraud. These activities are often coordinated by so-called front organizations, which are disguised as normal businesses but secretly support operations for terrorist purposes.

2. International transfer of funds:

The money generated in this way is then transferred internationally to further conceal its origin. Various methods are used for this purpose:

• The buying and selling of virtual currency within video games, which is conducted below market value in order to attract less attention.
• The exchange of this virtual currency into Bitcoin and then into conventional currencies to make tracing more difficult.
• The purchase of prepaid phone cards that can be used for anonymous communication.

3. Use of external service providers:

Some of the funds are forwarded via external call centers that offer seemingly legitimate services but actually contribute to supporting terrorist activities.

4. Logistics department of the terrorist organization:

Within the terrorist organization, there is a specialized logistics department that handles the distribution of funds. These funds are then used to finance further operational needs such as vehicles, weapons, communication equipment, and personnel.

5. End use of the funds:

The funds thus diverted and laundered eventually reach the terrorist-controlled area and are used there to directly support terrorist activities.

Regulatory framework: Provisions for combating terrorist financing

The regulatory basis for combating terrorist financing in Germany is the Money Laundering Act (GwG). Those obligated to comply include credit institutions, financial service providers, and insurance companies, as well as real estate agents, tax advisors, and notaries. A complete overview of all obligated parties can be found in our article “That's why you (might) need a KYC process.".

The Money Laundering Act (GwG) stipulates various measures that obliged entities must comply with and implement to combat and prevent terrorist financing. BaFin has particularly emphasized these three points.[8]:

Risk Analysis[9]

Companies must consider all aspects of their customers' businesses – from the products offered to the geographical risks. They must also take into account that money for terrorist activities can come from both legal and illegal sources.

Therefore, they should pay attention to reports and information from external sources such as the Federal Office for the Protection of the Constitution or the Financial Action Task Force (FATF), which can help identify additional risks.

Risk assessment[10]

When acquiring new customers, companies must proceed with due diligence to ensure they are not unknowingly supporting terrorist financing. Determining the applicable due diligence requirements in the customer onboarding process is therefore a key component of the prevention strategy. Obligated entities must assess the risk of each business relationship individually. Simply checking official sanctions lists or lists of high-risk countries is insufficient.

Companies should also use media reports and other publicly available information to learn more about their customers and uncover potential links to terrorist financing. Furthermore, it is important that the systems and lists used are regularly reviewed for their accuracy and effectiveness.

IT monitoring

According to the money laundering law, companies must constantly monitor their business relationships and transactions.[11]The systems used for this purpose must be able to recognize and process evidence from both illegal and legal sources.

KYCnow detects terrorist financing

A system for analyzing, detecting and preventing terrorist financing represents KYCnow With KYCnow, you can automatically check your customers and business partners for potential risks.

In addition to identifying beneficial owners, KYCnow also displays all corporate structures and intermediary companies. Comprehensive name screening against over 1.200 blacklists, watchlists, and sanctions lists, as well as checks for PEP status, is also integrated into KYCnow.

Monitoring and media screening

With the next expansion phase at the end of 2024, KYCnow will also receive a Monitoring-Function. Thanks to these automated solutions, you can directly detect changes in relevant data and, if necessary, take comprehensive measures to minimize risk.

Also a Media Screening It was integrated into KYCnow. These solutions allow messages to be scanned and analyzed for potential threats in seconds.

Are you interested in KYCnow and our other services? Then schedule an appointment now. free demo appointment and let's discuss together how we can support you and your company.

Sources

[1] https://www.bafin.de/DE/Internationales/GlobaleZusammenarbeit/FATF/fatf_node.html

[2] https://www.bafin.de/DE/Aufsicht/Geldwaeschepraevention/Terrorismusfinanzierung/Terrorismusfinanzierung_node.html

[3] https://www.zoll.de/DE/FIU/Aktuelles-FIU-Meldungen/2025/fiu_jahresbericht_2024.html

[4] https://de.statista.com/statistik/daten/studie/493217/umfrage/angriffe-und-festnahmen-mit-terroristischem-hintergrund-in-der-eu/

[5] https://www.consilium.europa.eu/en/eu-response-to-terrorism/

[6] https://www.forbes.com/sites/forbesinternational/2018/01/24/the-richest-terror-organizations-in-the-world/?sh=e235fa97fd17

[7] https://securityconference.org/assets/01_Bilder_Inhalte/01_Themen/05_Transnational-Security/MSC_Transnational_Security_Report.pdf Page 46

[8] https://www.bafin.de/DE/Aufsicht/Geldwaeschepraevention/Terrorismusfinanzierung/Terrorismusfinanzierung_node.html

[9] Section 5 paragraph 1 GwG

[10] Section 10 paragraph 2 GwG

[11] Section 10, paragraph 5 of the Money Laundering Act (GwG)

Photo of Marek Studzinski on Unsplash