Michael Richardson: US battles underworld that funds terrorists

The fifth anniversary this month of al Qaeda's devastating attacks on New York and Washington was a reminder that the United States, its allies and friends, and their people and assets overseas, including those in Asia and the Pacific, remain prime targets for terrorist attacks.

The new United States Treasury Secretary, Hank Paulson, was in Singapore last week to talk about high finance at annual meetings of the International Monetary Fund and the World Bank.

But in discussions on the fringe of such meetings he also urged his counterparts from Canada, Japan and Europe to give urgent attention to what the Bush Administration regards as a major issue of low finance: how to apply more effective curbs on terrorist funding from Iran and other sources.

Al Qaeda and its affiliates draw their support from extremists in the majority Sunni branch of Islam. But the recent fighting in the Middle East between Hizbollah, the Shiite movement in Lebanon, and Israel has focused attention on another source of extremism in the minority sect of Islam, backed by Iran's Shiite clerical regime.

The Bush Administration has long asserted that Iran is the world's leading state sponsor of terrorism.

Concern in Washington is intensifying over Tehran's nuclear programme and its backing for Shiite militias in Iraq's sectarian conflict. As it does so, the American-led crackdown on terrorist financing is growing in depth and scope.

Paulson told his counterparts from the world's leading industrial nations that more than 30 Iranian front companies had been identified by American intelligence agencies as channels for funding terrorist groups and other illicit activity. They were using banks and financial institutions in Europe and elsewhere, many of them blue chip.

This month the US Treasury department accused Bank Saderat, one of Iran's largest state-owned banks, of transferring hundreds of millions of dollars each year to Hizbollah and Palestinian terrorist organisations.

Iran and the United States do not have diplomatic relations and Iranian banks cannot open branches in the US. But American banks have been allowed to process certain funds from Iran, including indirect transactions that begin and end with a non-Iranian foreign bank. For Bank Saderat, that route has now been blocked.

Paulson and officials from his department have been trying to persuade regulators and banks in Europe, Asia and the Middle East to follow the United States' lead, and some global banks with extensive operations in Europe have cut their links with Iran.

American officials say they include UBS, Credit Suisse and HSBC. But many other leading banks have baulked, despite warnings from Washington about risks to their reputation and possible US penalties.

The holdout banks and other financial institutions evidently regard Iran - which has huge oil and natural gas reserves, promising economic growth potential and substantial commercial ties with France, Germany and Italy - as too valuable a market to forgo on the basis of American intelligence reports.

Some European officials express irritation with Washington's clampdown, describing it as a form of backdoor sanctions that bypass the United Nations Security Council, where there are divisions between the United States and Britain, on the one side, and the three other veto-wielding permanent members, China, France and Russia, over whether to impose mandatory multilateral sanctions on Tehran.

Shortly before the US penalised Bank Saderat, it took similar action against a charity operated by Hizbollah, two Iran-based companies holding and investing its money, and a senior leader and financial facilitator of the group.

In a separate action last month the US sanctioned two charities based in Saudi Arabia, accusing them of bankrolling the al Qaeda terrorist network in Southeast Asia.

In the past five years Washington has sought to outlaw around 460 entities and individuals for supporting terrorism. Among them are over 40 Islamic charities, including several that were based in America. This appears to be an impressive dragnet and is being trumpeted by US officials.

They say that the impact on dirty charities has been dramatic and that financial tracking helped to capture al Qaeda's Southeast Asian kingpin, the Jemaah Islamiya's operations chief Hambali, in Thailand in 2003.

Still, applying and maintaining effective curbs on the way money is raised and moved around the world by Muslim militants to fund political violence remains a major challenge for the international community.

US officials say that more than two thirds of the cases they have initiated were directed against al Qaeda and its old ally, the Taleban, in Afghanistan. These cases have been referred to a UN Security Council committee responsible for applying sanctions to a list of more than 120 al Qaeda affiliated entities and several hundred associated individuals.

UN member states are obliged to block the operations and freeze the assets of people and entities on the list. Of course, not all countries do. Some do not have the resources; others lack the political will.

But at least the al Qaeda network is covered by multilateral sanctions buttressed by the authority of a UN Security Council resolution. There is no such consensus in the international community over Hizbollah and Iran.

The US, Israel, Australia and like-minded countries brand Hizbollah as a terrorist organisation and Iran as a state sponsor of terror. However, many other countries do not. The European Union, for example, does not list Hizbollah as a terrorist group. Neither does Russia or New Zealand.

In this situation the US uses its status as the world's leading banking and financial centre as leverage to induce other nations and their banks to apply the penalties it has imposed unilaterally.

Washington has had some success but the overall impact on terrorist financing by the likes of Hizbollah and Iran is limited.

Terrorists, whether Sunni or Shiite, change identities and the names of their organisations to avoid sanctions and continue work. They move money through informal networks outside the banking system.

Most terrorist attacks involve relatively small amounts of explosives and associated materials. The cost of such operations is usually well under US$25,000 ($38,000) and big-sum bank transfers are not needed.

As a result, intelligence and law enforcement officials confront a hydra-headed target that is constantly moving and changing shape. And it does so in a financial underworld that is difficult to track and control.

* Michael Richardson is a senior research fellow at the Institute of South East Asian Studies in Singapore.