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Paper presented to ASEAN Security Symposium, August 2018 Part 1

Nigel Morris-Cotterill

The International Association of
Counterterrorism and Security Professionals

ASEAN Security Symposium

Monday 27 August 2018: 16:15
Intercontinental Hotel, Kuala Lumpur

Panel: The Regional Terrorism Financing Landscape

Speaker / Panellist Nigel Morris-Cotterill

Conventional Money, Unconventional Aims:
How Terrorists Are At The Forefront Of Financial Crime Risks

1. Thank you to the IASCP for inviting me to contribute to this regional forum and to the organisers for their diligence. And thank you, too, for making time to listen to me: much of this group is made up of those who are engaged, day to day, with the practical. I, on the other hand, am a strategist. It's my function to think the unthinkable, to say the unsayable, to create questions in the minds of those who make laws and those who enforce them. It's my function to challenge orthodoxies, and sometimes to cause upset to those who think there are boundaries beyond which those on our side of the fence should not go.

2. But, if those who are engaged in criminal conduct have no boundaries, as many do not, or if they create false boundaries beyond which they say we must not go, we must break down those boundaries no matter how uncivil we may appear. We cannot have no-go areas, be they physical, social or even theological. To be clear, I am not suggesting the kind of violent responses that we have seen in, for example, Syria. I am not suggesting the kidnap and torture of suspects as we have seen in the hands of some supposed civilised countries. But I am saying that we cannot allow, for want of a better description, any form of political correctness, be it race, religion or any other form, to prevent the proper investigation and policing of violent politically or ideologically motivated offences. Those offences are the offences that we usually term as "terrorism." So first I will challenge that term.

3. Terrorism is a technical crime. By that I mean that there is nothing in the offence of terrorism that is not already covered by other offences: the response to terrorism, that is to make it a discrete offence, is a political response to a political problem.

4. However, while terrorism is a political problem, that relates only to motive. In general, in criminal cases, motive is not a requirement for proving the offence. In general, motive is relevant to sentencing. Some might argue that the principle exception to this general rule is the offence of murder for which, at least in most Common Law jurisdictions, there must be "malice aforethought. " However, malice aforethought isn't actually motive: it's mens rea, that is to say the intention to commit conduct as a result of which there is the death of another human being. Mens rea and motive are not the same and should not be treated as if they are.

5. I have long argued that to have a discrete offence of terrorism makes it more difficult to secure convictions: it is necessary to prove both the intent and the motive. It is said that the reason for maintaining a discrete offence is because there can be, attached to that offence, more and stronger enforcement and investigation tools. Frankly, I don't think that argument holds water: it is increasingly common for there to be statutory provisions to compel defendants to answer questions. There are even requirements that witnesses be compelled to answer. Only last week, we have seen the UK's Serious Fraud Office subjected to serious criticism for using such an Order and applying for the arrest of a person who did not attend for interview and the SFO tacitly admitting that, in the specific case, their use of such an order was excessively aggressive.

6. The fact is that most of what is termed terrorism is carried out under the cloak of, for example, a religious brand but it is, in reality, nothing more than violent organised crime for the purposes of gaining wealth and/or territory.

7. It is therefore my contention that terrorism should not be regarded as a discrete offence but as an aggravating factor to be take into account in sentencing.

8. We must face a worrying truth: terrorism continues as a tool because terrorism works. Today, the overthrow of the British by colonists in what later became the USA would be classified as terrorism. Israel, as a state, was created as a result of terrorism against the British culminating in the bombing of the British headquarters at the St David's Hotel in Jerusalem. We, the British, then set the scene for the continuing conflict by failing to define a Palestinian territory with fixed borders and failing to compel the creation of a nation state of Palestine.

8. These examples demonstrate that attempts to simplify terrorism into good people and bad people don't work, but that is the simplistic view taken by many governments. And we see that, sooner or later, governments do, in fact, give those who use terrorism at least some of what they demand.

9. In Aceh, we saw that violent action by religious fundamentalists was resisted. But following a natural disaster, the Government of Indonesia quietly gave the fundamentalists much of what they had been demanding which included a significant degree of self-governance. In the Southern Philippines, religious fundamentalists who are also seeking political autonomy have armed gangs numbering the tens of thousands. They have long established links with other political / religious / criminal gangs across a large geographical area. They have an amazing array of heavy weapons in addition to the more usual personal arms and survived several months of air and troop attacks by the national government. In the past few weeks, they have achieved a second significant set of concessions including, like Aceh, a right to a significant degree of self-governance.

10. Across parts of ASEAN, we have long been in the grip of a two-pronged attack by those who wish to see Islam as the sole religion. There are two approaches. The first is violence: from the Southern Philippines across Southern Thailand and parts of Indonesia, this has been common. In Malaysia and other parts of Indonesia, there has been far less violence but there has been a back-door assault on the country by those who are clear: they are using democratic means to bring about the overthrow of democracy. The two approaches are conducted with a common aim: the creation of a Caliphate to cover the Southern Philippines, Indonesia, Brunei, Malaysia (including those states in Borneo), Southern Thailand and Singapore. Linguists will realise that these are the regions where there is a common base of language amongst the Muslim population - it's a common base that reaches as far as Papau New Guinea and some other Pacific islands. Interestingly, that is also a basis of more modern developments of national languages.

11. From all of this, we can see that what is generally termed terrorism is in reality a sub-set of organised crime and that organised crime and terrorism share common objectives: the gaining of territory and the control over it and over its people and, therefore, its wealth. It is also essential to make sure that we don't become involved in the sloppy use of language that refers to all serious violent crime as terrorism: it is important that, we have a discrete term and that we insist on it being properly used. Hollywood and politicians are driven by sound-bites and accuracy is lost which gets them headlines but makes your job, and mine, more difficult.

10. Taking, then, as a starting point, the idea that terrorism is a sub-set of organised crime, the question is what do terrorists and organised criminals contribute to each other and how do they feed off each other?

11. I'm not going to spend time on the nitty gritty of drugs and people trafficking, nor trafficking in weapons - most of you will already know that and will be dealing with it on a day to day basis. I don't need to tell you about the extortion and protection rackets, the so-called taxation, the businesses run by criminal enterprises nor theft, robbery, burglary and the like which have long been the way that criminal organisations, including those termed terrorists, raise the money that they use to bootstrap and maintain their strongholds. The first question for me, today, is about how the money flows are similar and, more importantly, what direction we can expect those money flows to take.

12. There is one thing that all countries should do as a matter of urgency: that is to make the funding of criminal conduct a criminal offence. This should not be restricted to terrorism. We should also adopt the broader definition of funding or financing to the USA's concept of "providing material support." This is important because we require ordinary people in ordinary jobs to do extraordinary things and we must make it as simple as possible. It is also because crime, be it terrorism or any other funded event, is supported by far more than money: it's shelter, food, transport, provisioning of weaponry etc. in some cases over a period of months. Indonesian-born terrorist suspect Mas Selamat Kastari escaped from a Singapore jail and crossed into Malaysia. He was a leader of regional terrorist group Jemaah Islamiah. Despite massive publicity and a huge man-hunt, he lived openly in a small village not far from the border for about a year. An entire village knew he was there. They claimed they simply noticed an old man move into a house and didn't ask questions. Clearly to focus entirely on currency rather than the wider support does not undermine terrorism at its roots.

13. There is another, equally simple and equally important reason for the change: laws and regulations require covered institutions, etc. and those who work in them to report suspicions of financing terrorism. That means that it is a complete defence to failing to make that report for someone to say "I thought it was just financing a bank robbery." The decision about what crime is being funded should not be made by a front line cashier or even a money laundering risk officer. By removing the distinction as to financing terrorism and financing other crime, that complication is removed at a stroke.

14. There is considerable focus on trade-based money laundering but that's old hat. Yes, it's happening and it's been happening for at least four thousand years. There's been a trendy focus on it in the past few years, but I was advising on it long before someone gave it a buzzword name. It is important and must not be overlooked but it is not even close to the biggest threat that modern terrorism has created in relation to payments and transfers. And it is this threat that is going to cross over into the wider criminal community and will cause enormous difficulty for investigations and enforcement agencies. Worse, it is, to a degree, going to be aided by those who make law and regulation who think they are being clever but in fact play directly into the hands of the criminals.

15. This is the biggest emerging threat: private label cryptocurrencies. But let's be clear: there is nothing new about the concepts nor even about the technologies. I'll explain.

16. If we apply the definition of "money" that is usual in relation to money laundering, which, incidentally, is the definition used by economists such as Galbraith, if two people accept that something has a defined value, then it can be regarded as money. Regulators like to over-complicate things and so there has been much discussion as to whether cryptocurrencies are in fact money and therefore subject to counter-money laundering laws and regulation. From where I stand, this is a facile argument to have. First, if we look at basic legal principles: contract law is all about rights and obligations, one of which is the obligation to transfer value. In contract law, it's called "consideration" and there are absolutely no limits, except legality, over what can be considered "consideration." It doesn't have to be a thing, it doesn't have to be tangible, it can even be a service or, even, the non-performance of an action. In relation to money from a criminal law perspective, if a jet ski can be regarded as money, if time can be regarded as money (as revenue authorities do in relation to time-banking), if paying someone for their services in, say, a bottle of Monkey Shoulder whisky or a case of Drapier Nature champagne is regarded as "money," then there is no logic in claiming that cryptocurrencies are not money and are therefore not regulated as money in relation to financial crime. It is an even more artificial distinction when one realises that several countries have or are in the process of creating their own national cryptocurrencies, a concept I suggested in an article when Greece's financial system was beyond meltdown.

17. In the UK, in the past couple of weeks, we have seen a successful prosecution for money laundering where the assets were bitcoin and in the past few months we have seen in the USA a number of cases where cryptocurrencies have been seized during investigations. So, slowly, common sense is breaking out and the arguments that crypto-currencies are anonymous is at last being eroded.

18. However, crypto-currencies have one significant feature that does, in fact, mean they are ideally suited to financial crime, be it related to organised crime or terrorism. And it's not the feature that is most widely and most inaccurately touted because anonymity is not quite what it's made out to be. It's a feature that the ISIS/ISIL/Da'esh generation of criminals who have demonstrated expertise in technology fields are able to easily exploit. But first let's be clear: those seeking to undermine governments have always used up to date technology: the anarchists of the 19th century used relatively recently developed machines to mass produce printed material some of which they sold because people value what they pay for.

19. The use of mobile messaging which was at the heart of riots in the UK and then civil disobedience across the Middle East passed from revolutionary to commonplace, so much so that WhatsApp, stung by criticism that its platform has been instrumental in the distribution of material which led to murders, is now planning to restrict, in some markets, the number of times a message can be forwarded and to limit the size of groups. Social media sites such as Facebook, Instagram and the like have demonstrated that they choose to allow pretty much anything so long as there are not complaints - or that it does not undermine the owners' ability to make profit.

20. The fact is that it takes about ten minutes to create a private messaging platform and, with territory, finding somewhere to host it is simple. While it would be a simple matter to disconnect mobile and internet communications to areas dominated by criminal gangs such as Boko Haram or the mountain camps in the Southern Philippines, no one does. And so anything that can be transmitted by mobile or internet becomes a means of payment. The obsession with cryptocurrencies is, therefore, to provide a free pass for other means of making payments.

21. Having said that, there is a special place for cryptocurrencies. All the information needed to create one's own version of bitcoin, etc. is a few clicks away. The technical skills needed are well within the capability of the young who form the leadership of Da'esh - and because they have freedom to communicate over the internet, they are able to call upon supporters in other parts of the world.

22. It is here, then, that the biggest financial crime threat arises. You already know that there are links between so-called terrorists and so-called organised crime. You know that drugs, people trafficking and weapons are common ground and that there is often barter or hawala type transactions. You also know that security for payments is enforced by violence.

23. The creation of what someone will no-doubt decide should be called "underground currencies" using crypto-currency is, in principle, no different to any other form of token. Twenty or more years ago, shipping containers full of Marlboro cigarettes or blank video cassettes were the tokens of choice for organised crime groups who took early advantage of the no-questions-asked policies of free trade zones to create what were, in effect, hidden banks. Now, every criminal has a bank in his pocket and the primary challenge for investigators in this world is to find the underlying system.

24. Counter-trade, forfaiting, barter, hawala and similar systems, over- and under- invoicing schemes, transfer pricing, royalties are all matters that I wrote about in the mid 1990s. That they have become trendy now, collected under the banner of "trade based money laundering" detracts from the fact that there is nothing new. I also wrote about electronic currency, the creation of private label online banks (the cost of which was USD100 for the software) and so on. The use of private label cryptocurrencies is not revolutionary, it is evolutionary, a logical next step because of what the criminals already know. But where there is something new is that those we classify as terrorists are younger, more tech savvy than in the past and they are able to set themselves up not only as the mechanism by which money is transferred but as the platform operator and thereby take a slice of every transfer. Those we call terrorists are in fact perfectly placed to be the bankers for global organised crime using a private label cryptocurrency system over which they have total control.

25. Here's the ultimate reason this is a big threat. There is absolutely nothing to prevent one such currency being instantly swapped out for another once law enforcement finds the first. So while you might think that closing down one payment network is a win, it is highly likely that there was already a back-up in place, with balances replicated, to swap in as soon as the first network is compromised.

26. It is not true to say that cash is dead. It is not true to say that the long established versions of making payments are obsolete. They are not. But if only, say, 10% of organised crime money made its way onto such a private label cryptocurrency with, say, a 5% transaction fee, significant amounts would flow into the hands of criminals, be they classed as terrorists or otherwise. The amounts would fund widespread violence where the currency can be used around the world for the relatively few supplies that most terrorism needs. And, mostly, you would have no idea it was there.

27. Last week, a contact said she had found it impossible to pay for her breakfast in a shop in China because only mobile payments were accepted. Some one else commented that his solution is to hand cash to the shop assistant who then uses his or her mobile payments method to pay. One thing we can be certain of: no matter what defences or systems are in place, someone is going to find a way to bypass them if those systems obstruct their efficiency. And someone, somewhere, will see an opportunity for profit. What if every shop had someone standing by who would take your cash and pay for your shopping for a 1% service charge or, even, simply rounding up to the next available bank note. Can this happen? By extension, the circumstances for it are already present: in Malaysia, Digi's standing bill payments systems do not accept coins. Customers using cash are required to overpay using notes only and their change is returned to them only in notes. This can result in an overpayment of as much as MYR4.99. This is a clear injustice for the payer for whom MYR4.99 might be enough for a whole day's food and his personal cash-flow is adversely affected. The incentive for such a third party to charge even MYR1 per transaction to release that change is present. It doesn't matter what system we create, someone is going to find a way to benefit from it.

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