More on “Charities for Terror” from the Terror Finance Blog

By David Nordell

David Frankfurter was completely correct in making the cynical comment in his recent article here ’Charities for terror,’ to the effect that nobody could know better than the Palestinian Authority about how charities are often used to channel money for terrorist infrastructure and attacks.

But it’s not that the Palestinian Authority is genuinely worried about this risk, as might possibly be (mis)understood from David’s piece. Even though the PA’s prime minister, Salim Fayad, is without doubt one of the most pro-peace and anti-corruption of all Palestinian leaders, the agenda here is not really about bringing Palestinian terrorism to heel: Fatah has far from abandoned the ’armed struggle’ against Israel. As the original Haaretz article he quoted points out, and as will be clearly understood by anyone who knows about Palestinian politics, the Fatah-dominated PA is most concerned about weakening its main political rival, Hamas. And unlike the PA, which receives a lot of its money from ’official’ donor sources, mainly generous foreign governments, Hamas raises most of its money through Islamic charity organisations operating around the world. So all that is going on here is that the Fatah is trying to strangle its rival by denying it funds.

Fortunately, the law of unintended consequences will probably apply here: although Fatah is by no means innocent of terrorism against Israel, or other targets, Hamas is far worse, so by weakening Hamas, the PA may indeed be helping Israel’s security. Of course, this is not happening out of any altruism. The PA’s leadership is not only engaged in a bloody power struggle with Hamas within the internal Palestinian arena, but trying to prove its legitimacy on the world stage, and especially in Israeli eyes, so that it can negotiate better political terms for the next stage of Palestinian national existence, whatever that may turn out to be; and the more harm Hamas does to Israel, the slower and more painful this negotiation will be. But however self-interested the PA’s action, at least it’s done something right.

By David Nordell

A couple of days ago, I noticed an unusual message in one of the Internet discussion groups for Middle Eastern — that is to say, mainly Arab — anti-money laundering professionals. What would happen to financial institutions in Gulf states, the questioner asked, if the United States were to mount a military strike against Iran, and Iran retaliated by attacking the Gulf countries? Do these institutions have business continuity plans that would enable them to keep on functioning?

The question is of much more than academic interest. As the days tick on, it is becoming increasingly clear that neither financial sanctions against Iran nor any other peaceful forms of pressure have slowed down Iran’s plans to build to full capacity a nuclear industrial infrastructure, and military capabilities, capable of producing and launching nuclear weapons. Whether the weapons are directed against Israel, Saudi Arabia, US bases in Bahrain or some target in Europe that would also be within missile range doesn’t really matter much: if Iran even tests a weapon, let alone decides to launch one or more missiles, a nuclear Iran would completely change the balance of power in the Middle East, and to a lesser extent in the world as a whole. If Iran’s nuclear capabilities are being developed faster than Western intelligence services believe (or, at least, faster than they are willing to admit), the possibility certainly exists that Iran will be able to rattle its nuclear sabre as a preemptive measure, to warn the USA and Israel that they shouldn’t even think about attacking.

The consequences of such a move would shake world capitals even if Iran were only to set off a test explosion in the desert. An attempted preemptive strike against Israel would, one can assume, lead to immediate Israeli retaliation and the effective destruction of Iran as a functioning state. But if, as the question was posed, Iran were to attack the Gulf — preemptively or in retaliation for a Western strike — the results would probably be much further-reaching. Oil and gas exports from the entire Gulf would simply stop, except perhaps for whatever could be redirected by pipeline to the Red Sea or ports on the southern coast of the Arabian peninsula; and even that is not certain, since the oil might be contaminated by fallout. But I suspect that the Gulf’s entire financial industry, which is the second most important business sector in the Arab world, and the most important for some Arab states, would simply stop functioning. Even with top-level business continuity planning, the only way that the Gulf’s banks and securities exchanges could continue functioning at a technical level is to have complete duplication, right down to key staff, in a centre such as London or Frankfurt; and even this wouldn’t prevent the run on Gulf banks that would be the inevitable result of any major strike on the Gulf. In fact, even a series of relatively small terror attacks would most likely produce this result.

Some might be pleased by anything that would take the Arab world down a peg or three, especially because the energy sector and the financial sector that has grown on its back have been pure windfalls for the Arab states: they’re not the results of deliberate investment in human capital or economic infrastructure, but simply presents from Mother Nature. Even superstar Dubai, with its seven-star hotels and artificial ski slopes, is living well on the back of the Gulf’s mineral resources. But I think that such potential Schadenfreude would be missing the point. The wealth concentrated in the Gulf’s financial sector, and most of all in the sovereign wealth funds (SWFs) of the UAE and Saudi Arabia, is so vast that any crisis would have knock-on effects for the financial sector worldwide, which is still trying to extricate itself from the effects of the sub-prime crisis. To take a not too extreme scenario, if the next time a Western bank the size of Citi or UBS is in the middle of negotiating a major capital investment from a Gulf SWF, and there is a sudden political-strategic bombshell (pardon the pun) in the Gulf itself, there will be a domino effect throughout the financial world. Simply put: you don’t need to attack New York to achieve the next 9/11.

Why am I discussing this on the Terror Finance Blog, you may ask. Firstly, because I think that as we develop our understanding of the world of terrorism and terror finance, it is going to become increasingly difficult to discuss finance alone, in isolation from other aspects of terrorism; and especially, it’s not only money that enables terrorism but many other resources as well. But much more importantly, I believe that the Arab states, and the anti-money laundering professionals who work there, have been turning a blind eye to the risks of not taking terror finance seriously enough, and this negligence may result in their downfall. Almost every discussion I have read on these closed forums, to say nothing of all the official speeches by Arab and other politicians and regulators at the many professional conferences in the Middle East, has taken money laundering seriously, sometimes exaggeratedly so. But the subject of terror finance causes no little embarrassment, and one recent discussion thread among Mideast compliance professionals tried to split hairs between terrorism and legitimate ’freedom fighting.’ After all, supporting the Palestinian ’national struggle’ is almost by definition legitimate, whatever the means employed; and supporting the spread of Islam through financing Muslim religious education worldwide (see my article “Exorcising the ’Saudi Spell’ “) is a religious duty, even if some of the people being educated end up as suicide bombers. Even legislation against terror finance in the Arab world is much weaker than laws against money laundering.

But the result of this equivocation is dangerous in the extreme. At the same time as Western states, led by the USA, are trying to put financial pressure on Iran through sanctions on Iranian banks, Iran can do business quite freely in most of the Arab world, whether through Iranian or Arab banks; and this simply means that the sanctions can not work (there are also a problem to do with Switzerland and other European states that have signed huge energy contracts with Iran, but I hope to discuss this soon). This facilitates the continuation of Iran’s nuclear plans, as well as more direct Iranian support of terrorist groups, whether in Iraq or Lebanon or elsewhere. And the business links are not only financial: there have been reports of dual-purpose products being imported by Gulf companies only to be sold off directly to Iran for military use. There is also, I believe, an element of blackmail: Iran is almost certainly sending subtle signals to the basically pro-Western Gulf states “if you don’t continue to keep the business and financial channels open to us, you can expect trouble.”

So, if knees are beginning to quake among the more prescient banking professionals in the Gulf, they may only have themselves to blame.