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The uphill battle against terrorism financing

Dirty money: Botswana is cranking up its defences
The provision of funds or resources (guns, arms or weapons of war) to a terrorist or terror organisation(s) has become a huge problem for governments across the world.

This manifests itself in many ways, with some countries being used as potential conduits for the passage of such transactions and other illegal transactions. It creates a much bigger challenge for financial institutions that have an obligation to fight against terrorism financing (Counter-Terrorism Financing) as per regulatory requirements.

The fact that terrorism financing can either be through legitimate funds (personal donations from salary or business profit donations) or funds from criminal activities (e.g. drug money) becomes a challenge for financial institutions to distinguish the true source and purpose of funds.

Charitable organisations and Money Service Businesses (MSBs) are thought to pose a high risk in respect of the potential for the financing of terrorist activities. As part of ongoing customer due diligence/Know Your Customer (KYC) on business activities of a company, the nature and type of business as well as an analysis of the company’s revenues (cashflows) can reasonably determine or trace the source of funds of the company.

With regards to charities, a similar comparison cannot be made as the source of funds can be from both legitimate and illegitimate sources. Therefore, a prediction of charitable organisation’s cashflows and revenues is not always a practical endeavour.

Charitable organisations are most likely to be targeted by terrorists or terror organisations since they are cash intensive and rely more on voluntary support and donations. This makes it less likely that suspicious transactions can be identified, and furthermore because of inadequate financial and internal control procedures in these organisations, it can lead to misallocation/misappropriation of funds to purposes beyond the intended nature of donations.

The fact that any person who presents themselves as being in support of a good cause can set up and run a charitable organisation and attract people to the stated good cause, makes it vulnerable to terrorism financing. Donors may offer to support the organisation provided the organisation in return assists them to transfer or deposit funds into their account or counterparts.

On a related matter, MSBs are businesses that transmit cash or agents

of cash, allow service of foreign currency exchange, for example, Bureaux de change, or liquidate cheques or other cash related instruments.

These businesses deal with high cash volume transactions, making them more prone to indirect terrorism financing, as the terrorists are able to use their services to transfer money internationally; convert their criminal activity cash into high denomination foreign currency through currency exchange; and transfer cash through payment methods such as digital currency or electronic money.

This exposure requires MSBs to adopt strong internal controls and robust compliance programmes that would intensively fight or prevent terrorism, otherwise they risk reputational damage.

It is also crucial that MSBs engage with relevant stakeholders such as regulators and financial intelligence units to seek guidance on the areas of compliance. Stakeholder engagement on this topic ought to be underpinned by improved information sharing specifically on challenges that hinder the combating of terrorism financing and money laundering trends and typologies.

Terrorism financing risk indicators are more like and closely linked to money laundering indicators. When financial institutions develop their terrorism financing controls, frameworks, processes and procedures, they must ensure that these are adequate and appropriate to detect the source of funds, purpose of funds and the destination of funds. Furthermore, in Botswana, financial institutions are required to ensure that their processes and procedures are effective and adequate to report suspicious transactions to the Financial Intelligence Agency within five days from the day a suspicious transaction is detected as per the Financial Intelligence Act & Regulations, 2019, respectively.

An institution’s internal process and procedures should be able to allow for immediate freezing of accounts where terrorist funds are suspected to be involved and be able to screen shareholders, signatories to the account, directors and controllers for terrorist connections.  In addition to the above, financial institutions must ensure that they maintain a good professional relationship with the regulators and ensure that their risk assessment and recommendations are aligned properly.

*Kgalemang is a Financial Crime Risk Analyst with First National Bank Botswana





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