Foreword
This draft document should be seen as a “food for thought” paper, providing background information about the significance of economic and financial aspects of terrorism. Nothing in this paper is meant to be the final word on such a complex and multidimensional phenomenon. We provide this document to the participants of the London Conference to support the discussion. It does not reflect any official position of the OSCE.
Introduction
We propose a concise review of the issue of terrorism. We first raise a few methodological questions. We overview resource, databases and expertise on terrorism. We consider some of the main and relevant findings on what we could call the “Economics of Terrorism and related Crimes”. We address financial aspects. We emphasise the importance of long term and comprehensive strategies for fighting terrorism. We also present the relevance of OSCE field activities in the economic dimension. In a final section, we sum up and put forward tentative proposals.
1. Methodological Issues
Definition. Already in the 1970s, experts predicted that “the dispute about a detailed, comprehensive definition of terrorism will continue for a long time, they will not result in the consensus and they will make no notable contribution towards the understanding of terrorism”. [1] More recently, an official report on world terrorism in 2000 underlined that “no one definition of terrorism has gained universal acceptance”. [2]
Data Collection. The absence of a common definition of terrorism did not prevent organisations from collecting data and information according to their understanding of the phenomenon. Despite shortcomings, one should rely on these documentary bases for studying the issue, provide recommendations and policy advice.
Broad Perspective. It is important to consider social events and processes that have or might have linkages with terrorism, namely: organised crime, insurgency, civil wars and international conflicts.
2. Resources on Terrorism
3. Explaining Terrorism
Besides general statements and common views offered by the media, there are research projects on the economics of crime. These works are based on the seminal article of Nobel Prize Winner G. Becker. [3] Following the work of Enders and Sandler, there is also growing literature on the economics of terrorism. Moreover, the World Bank is investing many resources to understand and better cure violence.
The Economics of Crime. The basic assumption of Becker’s model is that individuals are rational and before starting criminal activities they calculate and compare the expected returns of legal and illegal activities. For that purpose, the following parameters and variables are taken into account: the size of the reward (supposing that crime is successful), the probability to be caught and convicted, the severity of punishment, and the income of competing legal activities. Backer also asked how many resource and how much punishment should be used to enforce legislation and prevent crime. Recent studies enlarge Becker’s original model and consider, for instance, epidemic patterns and uncontrolled processes, which requires specific policy responses.
Explaining Terror. The Handbook of Defense Economics published in 1995 by North Holland includes a key-article of Enders and Sandler: “Terrorism: Theory and Application” (pp. 213-249). More recent studies of the two authors concentrate on transnational terrorism. [4] They first recognise the changing nature of terrorism. From the 1960s until the late 1980s the main motives for terrorism were nationalism, separatism, Marxism, etc. The 1990s see the emergence of religious factors. Thus, when counting terrorist groups the proportion of religious groups is increasing overtime. This qualitative change corresponds also to new behaviours and outcomes, and requires appropriate policy response.
“A terrorist group must first decide its allocation of resources between terrorist and non-terrorist activities. Next the group must allocate its terrorism-designed resources among various modes of attack [to maximise satisfaction]… A risk-loving group will attempt more risky operations, whose expected payoffs in terms of their impact on the targeted audience are greater and whose prices are also higher to the perpetrators than those executed by a risk-averse group… The increased proportion of fundamentalist religious groups and fanatical groups that are not averse to risks among the active terrorist groups in the post-cold war period is expected to increase the proportion of risky and logistically complex incidents undertaken…
[The statistical analysis of time series seem to indicate that] although the number of incidents has dropped dramatically during the post-cold war period, transnational terrorism still presents a significant threat… In recent years, [incidents are] more likely to result in death or injuries. [The incidents tend also display cyclical patterns.] The DEATH EVENTS series has two very long cycles: a primary cycle of 58.18 quarters and a secondary cycle of 23.98 quarters.
The rise of religious terrorism in which massive civilian casualties are the goal poses a potential dilemma … for policy. If a government responds by tightening security at official sites … its civilian targets will become relatively less secure. Destroying even a large portion of a group may not ameliorate the dangers for long, because the remaining fanatical members may attack with even greater resolve and vengeance.”
Enders and Sandler (June 2000), Op. Cit.
A 2001 study of Enders and Sandler uses new statistical methods to analyse terrorism. [5] They underline that deviations from the mean during high terror activity do not last whereas they may be sustainable during low-activity areas.
The World Bank Project. Recognising the devastating consequences of wars and violence, the World Bank initiated a major project in 1999 for “Understanding Civil Wars, Crime and Violence through Economic Research”. Several studies have underlined the importance of inequalities (and related poverty) as a key-factor explaining crime rates across countries; deterrence effects are also significant as well as criminal inertia, indicating that fighting crime must be a sustained policy. Considering civil war and political instability, one of the findings of World Bank studies is that the success or failure of insurgent forces depends on their capacity to raise funds, often linked to illicit activities such as the trafficking of drugs and, subsequently, money laundering. Foreign aid may have a positive impact on peace settlement in the long-term as well as good governance, democratic regimes allowing for a balanced representation of ethnic communities/minorities and extensive political and civil rights.
“Economists have usually abstracted from differences in preferences, treating the objective of rebellion as financial gains [obtained from the control of primary resources such as oil or opiates]. For example, Grossman states ‘the insurgents are indistinguishable from bandits and pirates’…
A second potential source of rebel finance is from diasporas living in developed countries… There are several reasons to expect that diasporas would increase the provision of finance for rebellion. [They] are usually much richer than the population in their country of origin… They do not suffer from the consequences of the conflict…
A third potential source of rebel finance is from hostile governments…
A further potential influence on rebel costs is the presence of accumulated physical, human and organisational capital. If a country has previously had a rebellion [e.g. against Soviet occupation in Afghanistan] there will be a stock of guns, former rebels who know how to use them and probably a persistent, if quiescent, rebel organisation.”
Source: P. Collier and A. Hoeffler, “Greed and Grievance in Civil War”, January 4, 2001.
Integrating Approaches. The comprehensive analysis of terrorism must certainly address a multitude of factors: domestic/international, political, social, economic, ethnical, etc. As indicated by the economics of crime and recent research findings of World Bank experts, economic variables matter for explaining terror activities. In that respect, unemployment, underdevelopment, poverty and inequalities should be seen as factors, as well as the disposition of substantial financial resources and international support networks, mainly provided by diaspora (which raises critical questions about immigration policies, integration and assimilation), and deterrence
Specificity of Suicide-Terrorism. Confined until recently to a few countries, suicide-terrorism may also represent a very specific category that requires more research for better understanding and elaborating corresponding preventive and reactive counter-measures, especially against initiators, supporters and facilitators. [6]
Moreover, the authors of the September 11 terror acts were not necessarily desperate people living in poor conditions. Some of them would appear as middle-class people, with an intellectual background, ready to espouse violent-prone causes and paradigms, supported by internationally based and wealthy crime-networks and possibly backed by so-called “rogue” or “failed states”. From that perspective, one should not exaggerate the importance of social conditions for explaining terrorism. [7]
It should also be made clear that any explanation for crime does not per se provide excuses or legitimisation.
4. Financial Aspects of Terrorism
The Importance of Fund Raising. As indicated by World Bank studies, the capacity to raise funds is essential for supporting organised violence and insurgency. In the case of September 11, formal and informal banking were used to channel illicit funds.
Formal Finance. More than $100 millions have already been seized since September 11 in terrorist-related assets and bank accounts. The FBI reviewed at least 200,000 documents and 10,000 accounts. Most countries of the world supported US investigations and actions. Some financial operations and bank accounts can be associated with money laundering.
Informal Finance. According to Washington Post journalists, we should not expect too much from investigations and the control of formal financial flows and banking operations. [8] What the Bin Laden’s group did most often was providing seed money to terrorist cells and asking them to rely progressively on their own resources. Raising money was done through petty crime acts such as theft and credit card fraud. Such crimes do not normally attract much attention. Besides crime activities aiming at self-reliance, crime-related international money transfers do not often use the formal transaction channels offered by legally registered and chartered banks. On the contrary, informal banking could even be the rule. The Arabic word Hawala “refers to money transfers, regardless of how it is made”. That financial system is based on mutual trust and personal relationship. It might even be faster, cheaper and more reliable than formal banking.
Money laundering. There are several definitions of money laundering. In broad terms, money laundering refers to the process by which illicit (in some cases criminal) money is integrated into the legal economy and then re-used openly for financing legal activities. Such a process involves several phases: “layering” corresponds to complex financial transfers aiming at separating the proceeds from their criminal origins; “integration” relates to the seemingly legal funding of legitimate economic activities.
The al Qaida network has used money laundering. In that respect, relying on the facilities and services offered by Western and Arab banks, the Emirates might have been a major location for such activities. According to a special report “INSIDE AL-QAEDA” published by the Financial Times on November 29, 2001, al Qaida accounts have been identified in at least 9 countries: South Africa, Sudan, Germany, Malaysia, Hong Kong (China), UK, Dubai, Cyprus and Yemen. Bank names are provided. It should be noted that not all transfers correspond to money laundering.
Funding Specific Terror Activities. Considering an e-advertisement (www.ipilot.com), preparing “September 11” might have required very limited resources. Thus, “prepare to invest around $7,000” to learn flying and obtain a private pilot license. Such an amount was definitely affordable by Bin Laden’s followers.
Providing Funds to al Qaeda. “Bin Laden’s organisation draws large amounts of money from wealthy Islamic donors and charitable groups, according to current and former U.S. officials, Pakistani intelligence sources, Muslim clerics close to Bin Laden and others who have studied his organisation. Some of the donors give because they believe in Bin Laden’s cause.
‘The global movement [al Qaeda] has hundred of well-to-do people almost everywhere in the world who are dying to make a financial contribution’, said a Muslim cleric in Pakistan… Other wealthy donors may be contributing to avoid potentially unpleasant consequences… Beyond individual donations, some of the $10 billion that the Saudi leadership showers on Islamic organisations through the ministry of religious works is said to find its way into Bin Laden’s coffers even though the funds are supposed to be used for social, educational and humanitarian purposes”. [9]
5. The Cost of Terrorism
Micro-costs. According to the Swiss Reinsurance Company, the world second largest reinsurance company, the September 11 attacks cost an estimated $90 billion, of which $19 billion was insured. [10]
Macro-costs. IMF experts have estimated the economic and financial cost of September 11. For that purpose, the specific conditions of the world economy by mid-2001 are taken into account and a multiplicity of channels through which the attacks affect the world economy is considered: 1) the destruction of life and property, 2) the confidence channel, 3) financial market responses, 4) commodity markets. The direct costs for the US are estimated at about $21.4 billions (i.e. much below the “Swiss figure”?). As many of the policies were insured abroad, there will be a net inflow to the US estimated to $11 billion.
“It is impossible at this stage to provide firm evidence on all of the channels by which the September 11 could affect long term potential”. Only rough estimates can be provided. “The loss of output from all sources could be as much as ¾ percent of (global) GDP (about $3-400 billion?)”. [11]
6. Fighting Terrorism
Comprehensive Perspective. The fight against terrorism must be global, involving directly or indirectly all countries, and comprehensive. That means using several instruments, including diplomacy, the legal and criminal system, freezing and seizing financial assets, countering money laundering, police and military force, and intelligence.
As indicated by the analysis of terrorist related phenomena, social and economic roots should be addressed with adequate instruments aiming at: better governance, the strengthening of the rule of law and democracy, the promotion and the defence of human rights, including those of minorities. In that perspective, education also plays a key-role by fostering values such as non-discrimination, tolerance and positive participation.
Short-Term versus Long-Run. Immediately, priority must be given to reaction, to arrest or neutralise those who share responsibility in the September 11 attacks and the bio-terror acts that followed. The epidemic nature of these criminal behaviours must be also recognised and stopped. That will definitely mobilise financial and economic means, forcing OSCE countries to revise and adjust public resources and expenditures accordingly.
In the medium and long run, prevention becomes essential and, as mentioned, it must be comprehensive. Terrorism can become a managed problem, under control and containment – it will never be fully solved. [12]
7. Addressing Financial Aspects
Money Laundering. Terrorist organisations benefit from activities such as money laundering. Money laundering could possibly be related to inappropriate banking and financial legislation and also the liberalisation (de-regulation) and globalisation of financial markets, and the status of special territories and countries. Subsequently, much effort is needed in most countries to improve and tighten controls on financial systems. The impact of financial innovations should also be carefully assessed. The effort is already supported by the private sector itself with the introduction of specific computer programmes to detect suspicious operations and the use of “black lists” on “risky clients”.
“FATF 40”. The 40 recommendations of the Financial Action Task Force on Money Laundering are generally recognised as the appropriate standards for combating money laundering. In that respect, the IMF and the World Bank are already taking measures for integrating the FATF 40 into their current work.
Further Issues. It is also essential to address informal banking and financing – what the IMF experts name “unsupervised financial intermediaries and other organisations”. [13] In fact, such institutions exist in all countries and they are particularly developed in low and middle-income countries (namely the developing world and most transition economies), where banking and financial systems are lacking sophistication and strength. They have a limited number of clients and the confidence of the broad public is missing.
8. OSCE Role in Preventing Terrorism
Portuguese OSCE Chairman-in-Office. In his first speech to the Permanent Council of the OSCE, the Portuguese OSCE CiO and Foreign Minister, Mr. Jaime Gama, announced that the fight against terror will be one of the most pressing priorities in 2002. That position reflects the December 2001 OSCE Ministerial Council that adopted a broad-ranging action plan to combat terrorism, including the need to address financial aspects. The OSCE also organised a Conference in Bishkek on prevention and countering terrorism.
Box 3: OSCE Ministerial Council Bucharest 2001 (Excerpts)
DECISION No. 1: COMBATING TERRORISM (December 4, 2001)
The 55 participating States of the OSCE stand united against terrorism, a scourge of our time.
The OSCE participating States … will combat (terrorist threats) by all means in accordance with their international commitments…
The OSCE participating States pledge to reinforce and develop bilateral and multilateral co-operation with the OSCE, with the United Nations and with other international and regional organisations, in order to combat terrorism in all its forms and manifestations, wherever and by whomever committed.
THE BUCHAREST PLAN OF ACTION FOR COMBATING TERRORISM (Dec. 4, 2002)
(13) Addressing negative socio-economic factors. Participating States/Secretariat: Will aim to identify economic and environmental issues that undermine security, such as poor governance, corruption, illegal economic activity, high unemployment, widespread poverty and large disparities, demographic factors…
(24) Suppressing the financing of terrorism: Participating States: Will, within the framework of the UN Convention on the Suppression of Financing of Terrorism and UNSCR 1373 (2001), take action to prevent and suppress the financing of terrorism, criminalise the wilful provision or collection of funds for terrorist purposes, and freeze terrorist assets.
Source: www.osce.org.
Specific Actions. The prevention of terrorism requires actions that address directly or indirectly many dimensions. In broad terms, that implies strengthening democratic institutions and the functioning of the state apparatus, supporting the development of the private economy and enhancing the environment. From that perspective, the OSCE already plays a key-role, especially with its activities in the economic and environmental dimension (EED), namely: strengthening civil society, supporting NGOs, private sector development (especially SMEs), good governance and addressing poverty. These activities help to build democratic institutions and open societies, characterised by the rule of law and based on market-oriented and self-sustainable economies.
9. Co-operation with other Organisations
The opportunities for co-operation with other organisations are quite wide and essential. As indicated by the Bucharest Meeting, the UN is the leading organisation in the fight against terror.
The following IOs are also important actual and potential partners, with fields of specialisation and activities that could matter for EED-OSCE initiatives, concrete events and actions against terrorism and related crimes: UN Office for Drug Control and Crime Prevention, European Union, Council of Europe, Organisation for Economic Co-operation and Development, Financial Action Task Force on Money Laundering, World Bank and International Monetary Fund, Bank for International Settlements (Basel Committee), World Trade Organisation, World Customs Organisation, Southeast European Co-operative Initiative, Environmental Crime Prevention Programme.
· The analysis of terrorism raises methodological issues. Nevertheless, they do not necessarily matter from a practical and policy-oriented perspective, at least in the very short-term. There are also plenty of resources addressing terrorism that can be mobilised.
· The economics of crime and related activities indicates the importance of economic and financial factors for explaining violence.
· Fighting terrorism requires a comprehensive perspective, with prevention being long-term oriented.
· Money laundering must become the focus of preventive measures, including the adoption and implementation of “FATF 40”, and the introduction of new “tools” in commercial banking. Nevertheless, there should be a special focus on informal banking for which intelligence and deterrence are quite essential.
· De facto, many on-going EED-OSCE activities are addressing aspects of terrorism. A strategy for future OSCE activities must rely on the “acquis” and new initiatives on poverty reduction, money laundering, border controls, sustainable development, etc.
· Relying on the OSCE comparative advantage, experience and field presence, co-ordination and co-operation with other IOs should definitely be supported. In that respect, the OSCE has missions in many countries, including the Caucasus and Central Asia. The Central Asian countries have also a high priority on the OSCE agenda.
· Considering the cyclical nature of terrorism and the capacity of terrorist groups to adapt themselves to new conditions, we may assume that the fight against terror will last decades and will be definitely complicated by the on-going globalisation process and international migrations.
· Even if the notion of “rogue states” is not widely supported, there might still be “failed state” that may harbour terrorist-related individuals and organisations. Such extreme cases must be adequately addressed and “fixed”. From that perspective, development aid should be seen as a key-instrument to reduce the risk of terrorism.
Finally, addressing terrorism should possibly refer to the need for lasting peace settlements and sustainable development in some regions of the world. Constructive dialogues and mutually beneficial exchanges between civilisations must be enhanced. Immigrants have also to be fully integrated within the context of “open societies” characterised by the rule of law, mutual tolerance and social justice. These issues go beyond the scope of this paper.
[1] Omar Malik, Enough of the Definition of Terrorism, Royal Institute of International Affairs, 2001.
[2] abc News.Com, Oct. 11, 2001.
[3] G. Backer, “Crime and Punishment: An Economic Approach”, Journal of Political Economy, Vol. 76, pp.175-209.
[4] W. Enders and T. Sandler, “Is Transnational Terrorism Becoming More Threatening”, Journal of Conflict Resolution, Vol. 44, No. 3, June 2000, 307-332.
[5] W. Enders and T. Sandler, “Nonlinar Effects and Improved Estimates of Transnational Terrorism”, April 2001.
[6] See Rohan Gunaratna, “The Employment of Suicide in Terrorism and Guerrilla Warfare”, in Vers une privatisation des conflits?, Recherches & Documents no 22, Avril 2001, pp. 43-60.
[7] This is not a new finding. For instance, in Western Europe, the most extreme left-wing students came from educated middle-class background. See Alejandro Chafuen, “War without End”, The Freeman, January 1979, Vol. 29, No. 1.
[8] R. O’Harrow Jr., D. Hilzenrath and K. De Young, “Bin Laden’s Money Takes Hidden Paths to Agents of Terror”, The Washington Post, Friday, September 21, 2001, Page A13.
[9] R. O’Harrow Jr., and al., op. cit.
[10] National Center for Policy Analysis, “Global Disaster Losses Reach $115 Billion in 2001”, Daily Policy Digest, Friday, December 21, 2001.
[11] IMF, World Economic Outlook – The Global Economy After September 11, December 2001.
[12] Despite the good will of donor countries and calls for “ethical globalisation”, one may assume that the North-South divide will remain a critical issue, partly because demographic trends in the developing world are not under control and do create more pressures and strains on natural resources, including clean air and drinkable water.
[13] IMF, “Intensified Fund Involvement in Anti-Money Laundering Work and Combating the Financing of Terrorism”, November 5, 2001.