2424

FACULTYOFLAW

THESIS BOOK
THE ROLE OF FRC IN COMBATING FINANCIAL
CRIME UNDER SOMALIA ANTI-MONEY
LAUNDERING AND COUNTERING FINANCING
TERRORISM
CANDIDATE
ABDUWALI ABUKAR OSMAM
ID: B6LW360

ATHESISSUBMITTEDINPARTIALFULFILLMENT
FOR THE REQUIREMENTS OF THE AWARD OF
LAUREAOFLAWATSOMALINATIONALUNIVERSITY

JANUARY 2024

I
 DECLARATION

I hereby declare that this proposal a research project entitled ‘THE ROLE OF FRC IN
COMBATING FINANCIAL CRIME UNDER SOMALIA ANTI-MONEY
LAUNDERING AND COUNTERING FINANCING TERRORISM” is my own work
and effort and that it has not been submitted to Somali National University (SNU) for
any award. Where other sources of information have been used, they have been
acknowledged.

Name: Abdiwali Abukar Osman

Signature:_________________________________

Date:….../……./2024

II
 APPROVAL

I certify this research report satisfies the partial fulfillment of the requirement for the
award of faculty of law at Somali National University (SNU).

SUPERVISOR

NAME: KASIM MOHAMED JAMA

Signature______________________________________

Date:……/………/2024

III
 FACULTY APPROVAL

This thesis is submitted in partial fulfillment of the requirement for the degree of laurea
law at Somali national university (SNU).

Academic year: 2023-2024

Dean of the faculty of law

Professor: Abdullah Omar Abdulla (marshaale)

Signature:__________________________________________

Date:…../……../2024

IV
 DEDICATION

I dedicate this thesis to God the Almighty, the creator. I also dedicate to my Parents
whom their words of encouragement and push for tenacity ring in my ears.

This work is especially dedicated to my beloved mother and father who gave me the
greatest love mercy, supporting, encouragement, nourishment, happiness, protection
from harmful things to me, teaching and all great appreciation to me.

I thank my dear brothers and sister without their motivation, knowledge, guidance and
love I wouldn’t have the goals I have to strive and be best to reach my dreams.

V
 ACKNOWLEDGEMENT

All praise and gratitude be given to ALLAH for giving us such a great strength,

patience, courage and ability to complete this thesis. I would like to express my

sincerest appreciation to my dear supervisor Prof. KASIM MOHAMED JAMA who

was always there for me if I needed guidance and kept my on the right track whose

thoughtful consideration and guidance has been invaluable. Without his guidance,

support and inspiration during the most critical period of my thesis, I would not have

been able to accomplish this study. To him, I wish to say ‘You are a wonderful

supervisor, and researcher. And I also thank. I appreciate and thank them for their

continuous support, advice, and comment. I would never for good all the chats and

beautiful moment I shared with some of my friend and class.

VI
 ABSTRACTS

The purpose of this study is to explore the role of frc in combating financial crime
under Somalia anti-money laundering and countering financing terrorism.

The main objective was to identify the role of FRC combating financial crime. It alsoto
examine the extent how FRC contribute anti-money laundering and countering
financing of tourism, To examine the way forward in solving FRC anti-money
laundering and countering financing of tourism.

This study recommended Strengthen Regulatory Framework: Enhance and enforce laws
and regulations related to anti-money laundering (AML), countering the financing of
terrorism (CFT), and combating the financing of proliferation (CFP). This includes
implementing robust Know Your Customer (KYC) procedures, customer due diligence
(CDD), and suspicious transaction reporting (STR) requirements.Enhance Financial
Intelligence Units (FIUs): Establish or strengthen FIUs to facilitate the collection,
analysis, and dissemination of financial intelligence to combat financial crime
effectively. FIUs play a crucial role in identifying and investigating suspicious
transactions.Promote International Cooperation: Foster collaboration and information
sharing among domestic and international law enforcement agencies, financial
institutions, and regulatory bodies. This includes exchanging intelligence, coordinating
investigations, and supporting mutual legal assistance requests. Conduct Risk
Assessments: Regularly assess the risks associated with money laundering, terrorist
financing, and proliferation financing. This helps identify vulnerabilities and prioritize
resources for prevention, detection, and enforcement efforts.Implement Effective
Supervision: Strengthen the supervision of financial institutions, including banks,
money service businesses, and virtual asset service providers. Supervisors should
conduct regular inspections, assess compliance with AML/CFT regulations, and impose
appropriate sanctions for non-compliance. Enhance Training and Awareness: Provide
comprehensive training programs for financial institutions, regulators, law enforcement
agencies, and other relevant stakeholders. This ensures that they are equipped with the
necessary knowledge and skills to detect, prevent, and report suspicious activities.

VII
DECLARATION........................................................................II
APPROVAL...............................................................................III
FACULTY APPROVAL...........................................................IV
DEDICATION.............................................................................V
ACKNOWLEDGEMENT........................................................VI
ABSTRACTS............................................................................VII
CHAPTER ONE..........................................................................1
1.0 Introduction.........................................................................................1
1.1 Background of study............................................................................1
1.2 problem statement................................................................................3
1.3 Objectives of the study........................................................................4
1.3.1 General objective of the study.......................................................4
1.3.2 specific objective...........................................................................4
1.4 Research questions..............................................................................5
1.5 SIGNIFICANCE OF THE STUDY....................................................5
1.6 SCOPE OF THE STUDY....................................................................6
1.6.1Content scope.................................................................................6
1.6.2 Geographical scope.......................................................................6
1.6.3 TIME SCOPE................................................................................6
1.7 definition of key terms.........................................................................6
1.8 conceptual frame work of the study....................................................7
CHAPTER TWO.........................................................................8
LITERATURE REVIEW...........................................................8
2.1 financial reporting centers (FRC.........................................................8
2.1.1 FRC MANDATE.........................................................................8
2.1.2 Strengthening AML/CFT legal framework..............................9
2.1.3 The Financial Reporting Center role.........................................9
2.1.4 Reporting and compliance........................................................10
2.1.5 Partnering to combat financial Crime.....................................11

VIII
 2.1.6 Global Cooperation...................................................................11
2.2 Financial crimes.................................................................................12
2.2 Main Types of Financial Crime..................................................13
2.2.1 Money laundering......................................................................13
2.2.2 Financing....................................................................................14
2.2.3 Cyber crime................................................................................14
2.2.4 Bribery and Corruption............................................................14
2.2.5 Evasion.......................................................................................14
2.2.6 Market Abuse and Insider Dealing..........................................14
2.2.7 Information Security.................................................................14
2.2.8 Measures against Financial Crimes.........................................14
2.3 Money laundering..............................................................................15
2.3.1 Stages of money laundering......................................................17
2.3.2 Money laundering methods......................................................18
2.3.3 Financial Statement Effects......................................................18
2.3.4 Indications of Possible Money Laundering.............................19
CHAPTER THREE...................................................................20
COUNTERING THE FINANCING OF TERRORISIM.......20
3.0 Countering the Financing of Terrorism in Somalia.............................20
3.1 Introduction.......................................................................................20
3.1. COUNTERING THE FINANCING OF TERRORISIM.................21
3.2. Financing of terrorism......................................................................22
3.3 Combating financing terrorism in Somalia.......................................22
3.4 Financing of terrorism offences special Somali AML CFT AC 2016
.................................................................................................................24
3.5 Main Terrorist Funding Sources........................................................25
3.6 International Initiatives to Counter the Financing of Terrorism........27
3.7 Evaluation of the Effectiveness of the International Initiatives........29
3.8 Main Challenges................................................................................30
3.9 Institutional measures in the private sector.......................................32

IX
 3.10 Operational measures......................................................................33
3.11 THE PROBLEM OF TERRORIST FINANCING..........................33
3.12 The Importance Of Combating Terrorism Financing......................34
CHAPTER FOUR......................................................................36
CONCLUSION AND RECOMMENDATION.......................36
4.0 INTRODUCTION.............................................................................36
4.1CONCLUSION..................................................................................36
4.2 RECOMMENDATION.....................................................................38
references....................................................................................41

X
 CHAPTER ONE

1.0 Introduction

This Chapter presents the background of the study, problem statement, and significance
of the study, research objectives and research questions, operational definitions of the
study. It further highlights the scope of the study as well as conceptual framework.

1.1 Background of study

Globally: The Financial Reporting Centre (FRC or the Centre) is a Government

institution created by the Proceeds of Crime and Anti-Money Laundering Act
(POCAMLA) 2009, with the principal objective being to assist in the identification of the
proceeds of crime and the combating of money laundering. The Prevention of Terrorism
Act (POTA) 2012 also mandates the Centre with the fight against financing of terrorism.
The Centre started operations in April 2012..(Fund, 2009)

Money laundering and the financing of terrorism are financial crimes with economic
effects. Money laundering requires an underlying, primary, profit-making crime (such as
corruption, drug trafficking, market manipulation, fraud, tax evasion), along with the
intent to conceal the proceeds of the crime or to further the criminal enterprise. These
activities generate financial flows that involve the diversion of resources away from
economically- and socially-productive uses—and these diversions can have negative
impacts on the financial sector and external stability of member states. They also have a
corrosive, corrupting effect on society and the economic system as a whole. Because of
the negative consequences of these forms of financial abuses on our members’ economies
and financial systems, the IMF has been very active for over ten years in the AML/CFT
area. AML/CFT controls, when effectively implemented, mitigate the adverse effects of
criminal economic activity and promote integrity and stability in financial markets..
(Fund, 2009)

The international community has made the fight against money laundering and the
financing of terrorism a priority. Among the goals of this effort are: protecting the

1
integrity and stability of the international financial system, cutting off the resources
available to terrorists, and making it more difficult for those engaged in crime to
profit from their criminal activities. The IMF's unique blend of universal
membership, (AML_CFT) - Topics, n.d.)

Locally: The FRC established by the Anti-money Laundering and Combating Financing
of Terrorism (AML/CFT) Act of 2016 acts as Somalia’s financial intelligence unit (FIU).
As the Somali law has criminalized money laundering and terrorist financing the FRC Is
mandated to serve as the national Center for the receipt and analysis of suspicious
transaction reports and other information relevant to money laundering, associated
predicate offences and terrorist financing, This meets FATF Recommendation 29 for
countries to establish a financial intelligence unit (FIU). The FRC receives reports from
financial institutions relating to suspicious and threshold transactions in accordance with
guidelines and formats developed by the FRC. Most importantly, the FRC works with
business, government, supervisory bodies and partners in law enforcement to help ensure
that our financial system remains intolerant to criminal abuse.

"The role of the FRC operations is to help rebuild the trust in the Somali financial system
and promote the confidence level of international banks and governments in the Banks
and Money Transfer Businesses (MTBs) that operate in Somalia by preventing Banks and
MTBs from being used for money laundering and terrorism financing. The FRC does this
byIssuing regulations, providing guidance and feedback to relevant ministries and
agencies as well as reporting entities in AML/CFT regime. Designing and implementing
compliance monitoring and enforcement systems for sectors that lack designated
supervisory authorities. Imposing proportionate, dissuasive, and effective administrative
sanctions and penalties. Representing the country in national, regional, and global
meetings, forums, and organizations that focus on AML.CFT issues.

Signing and implementing the memorandum of understanding and other agreements with
foreign financial intelligence units.

2
1.2 problem statement
The crimes of money laundering and terrorist financing are global problems that call for
global action and cooperation. Effective prevention of illicit activities in Somalia will be
primarily achieved by establishing reliable cooperation with Arab and African regional
countries and other international partners. Thus, Somalia joined the Middle East and
North Africa Financial Action Task Force (MENAFATF) to combat money laundering
and terrorist financing as a member of this regional group, which realized the need for
disseminating and applying the international AML/CFT standards all over the region.
Since the inception of the MENAFATF, the level of development in legislations,
procedures and supervisory tools of the member countries is increasing year after
another, especially if they are compared to the period that preceded the establishment.

There are several gaps or problems that need to be addressed by the Somali authorities in
order to effectively combat these crimes.

Lack of Adequate Legislation and Regulatory Framework: Somalia needs to establish

comprehensive legislation and a robust regulatory framework to address AML and CFT
effectively. This includes enacting laws that criminalize money laundering and terrorist
financing, as well as establishing regulatory bodies with sufficient powers and resources
to enforce these laws Limited Capacity and Resources: The FRC and other relevant
authorities in Somalia may face challenges due to limited capacity and resources. This
includes a lack of trained personnel, technological infrastructure, and financial resources
necessary to effectively investigate and prosecute financial crimes Weak International
Cooperation: International cooperation is crucial in combating financial crimes, as money
laundering and terrorist financing often involve cross-border transactions. Somalia needs
to strengthen its cooperation with international organizations, such as the Financial
Action Task Force (FATF), and other countries to exchange information, coordinate
investigations, and freeze assets related to financial crimes.

Informal Financial Systems: Somalia has a significant informal financial sector, which
can be vulnerable to abuse by criminals for money laundering and terrorist financing
purposes. The authorities need to enhance oversight and regulation of these informal
systems to prevent illicit activities.

3
Political Instability and Security Challenges: Political instability and security challenges
in Somalia can hinder efforts to combat financial crimes effectively. The authorities need
to prioritize stability and security to create an environment conducive to implementing
and enforcing AML and CFT measures.

Lack of Public Awareness: There may be a lack of public awareness and understanding
of the risks and consequences of financial crimes in Somalia. The authorities should
focus on raising awareness among the general public, businesses, and financial
institutions about the importance of AML and CFT measures and the role they play in
combating financial crimes.

Addressing these gaps and problems will require a concerted effort from the Somali
authorities, including the FRC, in collaboration with international partners and
stakeholders. By strengthening legislation, enhancing capacity and resources, promoting
international cooperation, regulating informal financial systems, ensuring stability and
security, and raising public awareness, Somalia can improve its ability to combat
financial crimes effectively.

1.3 Objectives of the study

1.3.1 General objective of the study

The main objective of the study was to examine the role of FRC in combating
financial crime under Somalia anti-money laundering and countering financing of
tourism

1.3.2 specific objective

1. To identify the role of FRC combating financialcrime

2. To examine the extent how FRC contribute anti-money laundering and countering
financing of tourism

3. To examine the way forward in solving FRC anti-money laundering and countering
financing of tourism

4
1.4 Research questions

1. What is the role of FRC combating financial crime?

2. How FRC contribute anti-money laundering and countering financing of tourism?
3. What the way forward in solving FRC anti-money laundering and countering
financing of tourism?

1.5SIGNIFICANCE OF THE STUDY

This study will be beneficial to researchers all over the world, especially those who
pursue the same academic discipline as this study.

The study will also be significant to the students behind me and investigating the same
problem or just like it; it will be a source of livelihood for them

The primary role of the FRC is to contribute to safeguarding the integrity of Somalia’s
financial system and its institutions, and to make them intolerant to abuse. For this
purpose, the FRC established close working relationship with the financial institutions,
which took strong measures to prevent the commission of money laundering and terrorist
financing crimes within their businesses and have implemented strict and strong KYC
procedures and trained their staff on those procedures

This enabled them to provide the FRC regularly with suspicious and large cash
transaction reports. Thus, Somalia’s financial institutions are now operating completely
within the government oversight and they would not turn a blind eye or facilitate illicit
flows that end up in the financial system. The FRC also collaborates with regulatory and
supervisory bodies to ensure that they fulfill their responsibilities to closely monitor
compliance with the AML/CFT Act requirements. Consequently, FRC conducts close
consultations with CBS as the regulator of the financial institutions in an effort to
produce the AML/CFT governance and compliance regulations and ensure a unified
approach across all areas of government in the implementation of the AML/CFT Act.
FRC also reached agreement with CBS to incorporate AML/CFT compliance
requirements in the Mobile Money Regulations (MMR)

5
1.6 SCOPE OF THE STUDY

1.6.1Content scope

This study intended to the role of FRC in combating financial crime under Somalia
anti-money laundering and countering financing terrorism

1.6.2 Geographical scope

This study was conducted in Mogadishu, Somalia.

1.6.3 TIME SCOPE

This study was conducted between November 2023 to2024

1.7 definition of key terms

 Financial report center (FRC): Is created to operate as a national central agency

to receive and analyze reports on suspicious and other financial information
relating to money laundering (ML) and the financing of terrorism (FT). It has the
authority to investigate financial crimes and disseminate the results of that
analysis.
 Anti money laundering. Money laundering is the funneling of cash or other funds
generated from illegal activities through legitimate financial institutions and
businesses to conceal the source of the funds. Money laundering is a global activity
that, like the illegal activities underlying it, seldom respects local, national or
international borders. As mentioned previously, current estimates of the size of the
global annual “gross money laundering product” range from $500 billion to $1.5
trillion.3 Only within the past dozen years or so has the world community begun to
recognize the threat money laundering poses to the orderly and open development
of international financial systems and world trade.

6
1.8 conceptual frame work of the study

Independent Variable (IV) Dependent Variable (DV)

Financial crime
1
2
Financial Reporting Anti-money laundering
centre (FRC)

Financing of terrorism

7
 CHAPTER TWO

LITERATURE REVIEW

2.1 financial reporting centers (FRC)

The FRC established by the Anti-money Laundering and Combating Financing of

Terrorism (AML/CFT) Act of 2016 acts as Somalia’s financial intelligence unit (FIU).
As the Somali law has criminalized money laundering and terrorist financing the FRC Is
mandated to serve as the national Center for the receipt and analysis of suspicious
transaction reports and other information relevant to money laundering, associated
predicate offences and terrorist financing, This meets FATF Recommendation 29 for
countries to establish a financial intelligence unit (FIU). The FRC receives reports from
financial institutions relating to suspicious and threshold transactions in accordance with
guidelines and formats developed by the FRC. Most importantly, the FRC works with
business, government, supervisory bodies and partners in law enforcement to help ensure
that our financial system remains intolerant to criminal abuse. (Miranville, 2021)

2.1.1 FRC MANDATE

FRC is created to operate as a national central agency to receive and analyze reports on
suspicious and other financial information relating to money laundering (ML) and the
financing of terrorism (FT). It has the authority to investigate financial crimes and
disseminate the results of that analysis.(Miranville, 2021).

8
2.1.2 Strengthening AML/CFT legal framework

Building a robust legislative and institutional foundation for the AML/CFT system is
critical for the building of a financial system free from abuse by money laundering and
terrorist financing activities. A national AML/CFT Committee is created to develop a
national AML/CFT strategy, promote capacity building, set strategic priorities for the
Financial Reporting Center, and oversee the implementation of the AML/CFT regime in
Somalia. The Minister of Finance chairs NAMLC meetings and deliberations. Acting as
secretariat for the Committee, FRC fostered the governing rules of NAMLC and assisted
with the creation of a NAMLC operational arm with a focus on implementing its
directives and responsibilities as the oversight body of Somalia’s AML/CFT regime. The
Taskforce is designed to ensure the implementation of the law in a coordinated manner
and on the basis of institutional cooperation. A number of key AML/CFT stakeholders
are represented in both NAMLC and the Taskforce.(Miranville, 2021)

2.1.3 The Financial Reporting Center role

The FRC is an independent national agency responsible for receiving, requesting,

analyzing, and appropriately disseminating information concerning money laundering
and terrorist financing. It is also involved in the analysis of suspicious financial activities
and the investigation of financial crimes as well as AML/CFT risk assessment and
issuing regulations and guidelines for reporting entities. The declared vision and mission
of the FRC is to become a trusted and exemplary agency in support of a robust financial
system hostile to financial crimes and to help rebuild Somalia’s financial system and
restore its credibility in the global financial networks. The Somali law criminalizes
money laundering and terrorist financing. Therefore, FRC is mandated to undertake
systematic collection and analysis of data associated with money transfers and document
suspicious transactions and provides strategic intelligence including statistics and
typologies aimed to increase risk awareness. FRC contributes to building and maintaining
an environment in Somalia that is directed to identify and eradicate money laundering
and terrorist financing. This objective has national value in its own right as well as
fulfilling Somalia’s international obligations (FATF’s 40 recommendations) to combat
money laundering and terrorist financing. The FRC plays a key role in addressing ML/FT

9
challenges and is working closely with the reporting entities including financial
institutions and designated non-financial business and professions. It guides the work of
economic operators towards the detection of financial transactions suspected of links to
money laundering (ML) and terrorist financing (FT). To sum up, the FRC is Somalia’s
financial intelligence unit, and the country’s anti-money laundering and counter-terrorism
financing (AML/CFT) coordinator. It is created by the Federal Government of Somalia in
order: To collect, analyze and share – as necessary - financial intelligence with finance,
law enforcement, national security and other partner agencies in Somalia and overseas; •
To ensure compliance with the AML/CFT Act and regulations and protect the integrity of
Somalia’s financial system; • Design and implement compliance monitoring and
enforcement systems for sectors that lack designated supervisory authorities. • Represent
the country in national, regional and global meetings, forums, and organizations that
focus on AML/CFT issues. • Agree on and implement Memoranda of Understanding and
other agreements with foreign financial intelligence units. • To provide guidance and
feedback to relevant ministries and agencies as well as reporting entities on AML/CFT. •
Impose proportionate, dissuasive and effective administrative sanctions and penalties, as
required. The FRC coordinates the development of anti-money laundering (AML) and
countering the financing of terrorism (CFT) framework by proactively working with all
stakeholders to ensure the AML/CFT regulations translate into an effective control
framework across businesses and professions. Having created the AML/CFT legal
framework, Somalia has become in line with international requirements based on the
recommendations of FATF, the leading global regulator of AML/CFT since 9 /11 and
joined the membership of MENAFATF, the Middle East and North Africa regional body
of FATF.(Miranville, 2021)

2.1.4Reporting and compliance

The primary role of the FRC is to contribute to safeguarding the integrity of Somalia’s
financial system and its institutions, and to make them intolerant to abuse. For this
purpose, the FRC established close working relationship with the financial institutions,
which took strong measures to prevent the commission of money laundering and terrorist
financing crimes within their businesses and have implemented strict and strong KYC

10
procedures and trained their staff on those procedures. This enabled them to provide the
FRC regularly with suspicious and large cash transaction reports. Thus, Somalia’s
financial institutions are now operating completely within the government oversight and
they would not turn a blind eye or facilitate illicit flows that end up in the financial
system. The FRC also collaborates with regulatory and supervisory bodies to ensure that
they fulfill their responsibilities to closely monitor compliance with the AML/CFT Act
requirements. Consequently, FRC conducts close consultations with CBS as the regulator
of the financial institutions in an effort to produce the AML/CFT governance and
compliance regulations and ensure a unified approach across all areas of government in
the implementation of the AML/CFT Act. FRC also reached agreement with CBS to
incorporate AML/CFT compliance requirements in the Mobile Money Regulations
(MMR). (Miranville, 2021)

2.1.5Partnering to combat financial Crime

To integrate our financial intelligence products into the work of broader government,
FRC developed a mechanism to involve other government institutions in combating
financial crime by entering into memoranda of understanding (MOUs) with the
Commissioner of Police and the Attorney General in order to facilitate the investigation
and prosecution of financial crimes. This enforcement framework will facilitate the
follow up and investigation of suspicious financial crimes. These MOUs enable FRC to
have seconded crime detectives and prosecutors to conduct in-house investigation and
prosecution. The financial intelligence provided by the FRC is used by investigating
agencies in their investigations, but cannot be used as evidence in a court of law. FRC
can be called upon to corroborate evidence that is produced by other government
agencies based on information provided by the FRC, but it is incumbent on the law
enforcement agencies to provide the evidence that will be used in a prosecution.
(Miranville, 2021)

2.1.6Global Cooperation

The crimes of money laundering and terrorist financing are global problems that call for
global action and cooperation. Effective prevention of illicit activities in Somalia will be
primarily achieved by establishing reliable cooperation with Arab and African regional

11
countries and other international partners. Thus, Somalia joined the Middle East and
North Africa Financial Action Task Force (MENAFATF) to combat money laundering
and terrorist financing as a member of this regional group, which realized the need for
disseminating and applying the international AML/CFT standards all over the region.
Since the inception of the MENAFATF, the level of development in legislations,
procedures and supervisory tools of the member countries is increasing year after
another, especially if they are compared to the period that preceded the establishment.
MENAFATF members and Somalia share similar concerns, for example, over crimes
related to money transfers, trade in small arms and weapons, Illicit cross border
transportation of cash, trade in precious metals, and trade in charcoal and human
trafficking. Somalia also represented by FRC signed several MOUs with financial
intelligence units of neighboring African countries and agreed to cooperate in the
exchange of financial intelligence to assist in the investigation and prosecution of persons
suspected of money laundering and terrorist financing.(Miranville, 2021)

2.2 Financial crimes

Financial crime is a broad term used to describe criminal activities that involve money or
other financial resources. It refers to any illegal activity that involves the use of financial
systems, institutions, or instruments for illicit purposes, typically with the goal of generating
profits for the perpetrators. Financial crimes can take many different forms, from money
laundering to fraud, embezzlement, insider trading, and cybercrime .These crimes are often
committed by individuals or groups seeking to profit from illegal activities, such as drug
trafficking, human trafficking, or terrorism. Financial crimes can have serious consequences
for individuals and society as a whole, including economic instability, loss of public trust
in financial institutions, and erosion of the rule of law.(Report, 2024)

Financial crime is a complex and ever-evolving problem that requires a multifaceted

approach to combat. Law enforcement agencies, regulatory bodies, and financial institutions
all play important roles in detecting and preventing financial crimes. Effective measures to
combat financial crime include strengthening anti-money laundering and counter-terrorist
financing regulations, enhancing cross-border cooperation, and leveraging technology and
data analytics to identify suspicious activities. Terrorist Organizations need financial support

12
to achieve their goals. Terrorist organizations raise funds through criminal activity, self-
financing, and legitimate resources.Money laundering is the process of turning earnings
from crime into legal earnings. Cartels and gangs are the most common money launderers.
Some sophisticated techniques may include different financial institutions such as
accountants, shell companies, and financial and consulting institutions. These criminal
organizations use assets that make money laundering and increase complexity to finance
money laundering in illegal money transfers between countries and terrorism. As a result,
regulators have obliged financial institutions to implement various controls to prevent
financial crimes. These are commonly referred to as "anti-money laundering obligations."
Organizations that do not fulfill their AML obligations are punished with fines by regulatory
bodies.These crimes are often committed by individuals or groups seeking to profit from
illegal activities, such as drug trafficking, human trafficking, or terrorism. Financial crimes
can have serious consequences for individuals and society as a whole, including economic
instability, loss of public trust in financial institutions, and erosion of the rule of law.
(Report, 2020)

Financial crime is a complex and ever-evolving problem that requires a multifaceted

approach to combat. Law enforcement agencies, regulatory bodies, and financial
institutions all play important roles in detecting and preventing financial crimes. Effective
measures to combat financial crime include strengthening anti-money laundering
and counter-terrorist financing regulations, enhancing cross-border cooperation, and
leveraging technology and data analytics to identify suspicious activities. Terrorist
Organizations need financial support to achieve their goals. Terrorist organizations raise
funds through criminal activity, self-financing, and legitimate resources.(Report, 2020)

2.2Main Types of Financial Crime

2.2.1 Money laundering is a financial crime that involves disguising the proceeds of
illegal activities such as drug trafficking, bribery, or fraud as legitimate funds. The goal is
to make the funds appear legitimate so they can be used without detection. This process
usually involves a series of transactions that make it difficult to trace the origin of the
funds.(Report, 2020)

13
2.2.2 Financing. Terrorist financing is the process of providing funds or financial support
to individuals or groups who carry out terrorist activities. This can include providing
money to purchase weapons or fund terrorist attacks.

Fraud. Fraud is a type of financial crime that involves intentionally deceiving someone
for personal or financial gain. Examples of fraud include identity theft, investment scams,
and insurance fraud.

2.2.3Cyber crime. Electronic crime, also known as cybercrime, is a type of financial

crime that involves the use of computers or the internet to commit fraudulent activities.
This can include hacking into computer systems to steal personal information, credit card
fraud, or phishing scams.

2.2.4Bribery and Corruption. Bribery and corruption are financial crimes that involve
offering or accepting money or other benefits in exchange for favors or preferential
treatment. This can occur in government, business, or other sectors.

2.2.5Evasion. Tax evasion is the illegal non-payment or underpayment of taxes by

individuals or businesses. This can involve failing to report income, claiming false
deductions, or hiding assets.

2.2.6Market Abuse and Insider Dealing. Market abuse and insider dealing involve
using inside information to make financial gains or manipulate markets. This can include
insider trading, spreading false rumors, or manipulating stock prices.

2.2.7Information Security. Information security involves protecting sensitive

information from unauthorized access or disclosure. This can include theft of personal
information, hacking into computer systems, or corporate espionage.

2.2.8Measures against Financial Crimes

There are many national and global organizations to combat financial crimes. For
instance, The Financial Crimes Enforcement Network (FCEN) is a US and Treasury
Department's office that collects and analyzes financial transactions to combat national and
international money laundering, terrorist financing, and other financial crimes. These
organizations publish regulations that companies have to comply with. Regulators impose

14
penalties on organizations that do not comply with regulations. Financial institutions must
comply with compliance regulations such as AML and KYC requirements. With the
development of technology, methods of combating financial crimes are developing. With
the developing Retch sector in recent years, solutions to combat financial crimes have
increased. AML solutions, developed with artificial intelligence and machine learning
methods, enable the detection and prevention of financial crimes. AML solutions
are increasing year by year because manual control methods are dysfunctional and waste a
lot of time. Sanction Scanner provides solutions that support companies' fight against
financial crimes and compliance with AML regulations. AML Name Screening Software
provides companies to control their customers in sanction, PEP, and adverse media data
during the customer on boarding and customer monitoring process. Transaction Screening
Software enables financial institutions to control the receiver and sender of money transfer
transactions in sanction, PEP, and adverse media data. AML Transaction Monitoring
Software, on the other hand, ensures that all transactions of all customers are automatically
controlled according to risk rules and scenarios and anomaly transactions are detected.
(Report, 2020)

2.3 Money laundering

Money laundering is the funneling of cash or other funds generated from illegal activities
through legitimate financial institutions and businesses to conceal the source of the funds.
Money laundering is a global activity that, like the illegal activities underlying it, seldom
respects local, national or international borders. As mentioned previously, current
estimates of the size of the global annual “gross money laundering product” range from
$500 billion to $1.5 trillion.3 Only within the past dozen years or so has the world
community begun to recognize the threat money laundering poses to the orderly and open
development of international financial systems and world trade.(Anti – Money
Laundering, 2004)

The term “money laundering” started to draw attention in the early nineties and it has
been defined in different ways. Regardless of definitions, the core meaning of the term is
the process of turning illegally gained money into legal and lawful money with the

15
purposes (i) to disguise original source of criminal or illegal money and (ii) to eliminate
the trail of flowing illicit money. In fact the term “money laundering” is applied not only
to financial transactions related to criminal activities but to any financial transaction
which generates an asset as a result of illegal acts – corruption, tax evasion, false
accounting, etc. It seems that the process of ML has long ago been used by criminals such
as robbers and pirates although the money laundering has come to the attention of the
international community only in the nineteenth century. Although the definition of money
laundering is not stated in the United Nations Convention against Illicit Traffic in
Narcotic Drugs and Psychotropic Substances (Vienna Convention, 1988), the concept of
money laundering can be inferred from Article 3 of the Convention that defines criminal
offenses and the laundering of proceeds of crime. It reads: (Anti – Money Laundering,
2004)

Each Party shall adopt such measures as may be necessary to establish as criminal
offenses under its domestic law, when committed intentionally:

(a) (i) The production, manufacture, extraction, preparation, offering, offering

for sale, distribution, sale, delivery on any terms whatsoever, brokerage,
dispatch, dispatch in transit, transport, importation or exportation of any
narcotic drug or any psychotropic substance contrary to the provisions of the
1961 Convention and the 1961 Convention as amended or the 1971
Convention;

(ii) The cultivation of opium poppy, coca bush or cannabis plant for the purpose
of the production of narcotic drugs contrary to the provisions of the 1961
Convention and the 1961 Convention as amended;

(iii) The possession or purchase of any narcotic drug or psychotropic substance

for the purpose of any of the activities enumerated in (i) above;

(iv) The manufacture, transport or distribution of equipment, materials or of

substances listed in Table I and Table II, knowing that they are to be used in or for

16
 the illicit cultivation, production or manufacture of narcotic drugs or psychotropic
substances;

v) The organization, management or financing of any of the offenses enumerated

in (i), (ii), (iii) or (iv) above. Money laundering is a process of three stages –
placement stage, layering stage and integration stage – which may occur
simultaneously or stage by stage or they may overlap. As the process of money
laundering has become the centre of attention, money laundering cases have been
analyzed seriously, thoroughly and systematically. The common features of
money laundering are hiding the true ownership and origin of the funds, taking
care of the proceeds in good condition, transforming the proceeds using
sophisticated methods and constant pursuit of profit or financial gain with
elevated motivation. Money laundering has taken place in one form or another as
long as profit has existed. The most prominent methods used by money launderers
are use of the advanced technological means, professional assistance and
transnational movement of funds by taking advantage of differences in language
and criminal justice systems in different countries. (Anti – Money Laundering,
2004)

2.3.1 Stages of money laundering

ML as well as FT is not a single act but a process whose prominent stages as stated
earlier are: placement; layering; and integration.(Substances, 2009).

Placement refers to the beginning stage of entry into legal financial systems. Various
criminal groups endeavor to place large amounts of illegitimate cash into the legitimate
financial systems. They choose any State, regardless of distance far or near, which is
poorly regulated and that has lax banking system to deposit their illicit money.
Sanitization or whitewashing is done to clean up the portrayal of particular issues and
facts that may conflict with the official point of view.Layering refers to the creation of
complex and sophisticated networks and transactions which attempt to blur the link
between the initial stage and the end of the laundering cycle. Having entered the proceeds
into the legitimate financial systems, money launderers and the criminals who finance the

17
terrorists attempt to obscure the entry point of legal financial systems and evade scrutiny
by regulators or law enforcements by using sophisticated methods such as surfing, using
different bank accounts, buying gold bullions, etc. In other words, in order to shrink the
huge volumes of cash generated by the initial criminal activity, a large amount of money
is transformed into various forms of property, for example, buying precious stones that
have less attraction to the authorities concerned.Integration, which is the final stage in
the process, refers to the return of funds to the legitimate economy for later extraction.
Integration of laundered money into the legitimate economy is accomplished by the
money launderer and terrorist financier by making it appear to have been legally earned.
It is, therefore, extremely difficult to distinguish legal and illegal wealth from the
integrated affluence.(Substances, 2009)

2.3.2 Money laundering methods

The APG, as one of the FATF-style regional bodies (FSRB) on money laundering, has
studied and analyzed the methods, techniques and trends of money laundering and
terrorist financing since its establishment in 1997. Findings from typologies work enable
the regulatory, supervisory and law enforcement agencies to understand the current and
emerging trends of money laundering and terrorist financing. The following are a few key
money laundering and terrorist financing methods, techniques, schemes and instruments.
(Substances, 2009)

1. Association with corruption ( bribery, proceeds of corruption and instances of

corruption undermining AML-CFT measures)

2. Currency exchanges / cash conversion

3. Cash couriers / currency smuggling

4. Structuring / surfing

5. Use of credit cards, checks, promissory notes, etc)

18
2.3.3 Financial Statement Effects

Money launderers tend to use business entities more as a conduit than as a means of
directly expropriating assets. For this reason, money laundering is far less likely to affect
financial statements than are frauds such as misappropriations. Consequently, money-
laundering activities are unlikely to be detected in a financial statement audit. In addition,
while most frauds result in the loss or from their source quickly and in as undetectable a
manner as possible. Because money-laundering activities may, however, have indirect
effects on an entity’s financial statements, they are of concern to external auditors.
Disappearance of assets or revenue, money laundering involves the manipulation of large
quantities of illicit funds to distance them. (Anti – Money Laundering, 2004)

2.3.4 Indications of Possible Money Laundering

Money launderers use many different and sophisticated types of schemes, techniques and
transactions to accomplish their ends. While it would be difficult to describe all money
laundering methodologies, the following are the more frequently observed signs of
suspicious activity: Broadly, transactions that appear inconsistent with a client's known
legitimate (business or personal) activities or means; unusual deviations from normal
account and transaction patterns. (Anti – Money Laundering, 2004)

• Any situation where personal identity is difficult to determine;

• Unauthorized or improperly recorded transactions; inadequate audit trails;

• Unconventionally large currency transactions, particularly in exchange for negotiable

instruments or for the direct purchase of funds transfer services;

• Apparent structuring of transactions to avoid dealing with identification requirements or

regulatory record-keeping and reporting thresholds;

• Transactions passed through intermediaries for no apparent business reason;

19
 CHAPTER THREE

COUNTERING THE FINANCING OF TERRORISIM

3.0 Countering the Financing of Terrorism in Somalia

3.1 Introduction

Somalia is a member of MENAFATF. In 2019, FGS continued to strengthen institutional

AML/CFT efforts, including support for the Financial Reporting Center, the country’s FIU,
which began operations in November 2018. Commercial banks and “hawala” money
transfer bureau compliance officers, in accordance with legislation and regulations, have
been submitting suspicious transaction and large currency transaction reports to the FRC on
a monthly basis. The Central Bank of Somalia adopted its first-ever strategic plan, which
identified full implementation of an AML/CFT framework as its number one strategic goal.
Somalia finalized AML/CFT regulations in September, which will operationalize the
government’s ability to monitor financial transactions and take action to investigate
potential terrorism financing. The government also adopted regulations governing
mobile money transactions in August to close gaps in the AML/CFT regime and more

20
closely monitor the substantial movement of money through services provided by the
telecommunications sector.(United States Department of Labor, 2006)

Countering Violent Extremism:The FGS Office of the Prime Minister is responsible

for coordinating government efforts and international support for CVE. The Prevention and
Countering Violent Extremism Coordinator was established in 2018 and now leads a regular
working group. The National Strategy for Public Awareness was established by the
Ministry of Information, Culture, and Tourism in 2018 as a three-year strategy that includes
specific lines of effort for CVE through the media. Following the February 2017
presidential election, the FGS announced its intent to offer amnesty to any AS member
willing to denounce terrorism and support the FGS. A donor-supported effort to reintegrate
former AS combatants continues, primarily through reintegration centers operating in
Mogadishu, Kismayo, and Baidoa. Somalia is also a newly established GCERF beneficiary
country.(Somalia - United States Department of State, n.d.)

3.1.COUNTERING THE FINANCING OF TERRORISIM

As the flow of funds to terrorist groups may serve to prolong a group’s campaign and
operational capability and can determine short-term and long-term goals,70 efforts to
curtail that flow of funds are vital to reducing the threat of terrorism. However, the
research found that, unlike many of the terrorist acts themselves – which are dissected
and discussed widely both in the media and officially – information on many of the
financial aspects of the terrorism puzzle are not widely available through open sources.71
Clearly, there are many systems in place under a broad effort in anti-money laundering
and countering the financing of terrorism (AML/CFT).72 The research indicates,
however, that even though many counter-measures against terrorist financing have been
put in place – and a significant increase in AML/CFT efforts occurred after the terrorist
attacks of 11 September 200173 – there is still not a systematic approach to actually
comprehensively curtail the financial and economic structures of these groups.74 This
section will primarily focus on CFT and the relevant aspects of it for the two cases
outlined above: Boko Haram and al-Shabaab in Africa. As the previous sections outlined,
terrorist groups have engaged in various types of financial activity to keep their
operations afloat. Besides raising funds, they must also devise ways to move, store, and

21
use these funds. Terrorist groups have carried out these transactions using bulk cash
couriers or through various financial services, some of which are part of the traditional
banking system – such as remittance services, and wire transfers – while some opt to
employ new technologies, such as mobile apps like M-Pesa, or informal money transfer
systems like hawala.75 The following analysis outlines a number of the CFT measures in
place to address these various types of transactions at this time(Markovic, 2021)

3.2.Financing of terrorism

Despite the fact that the definition of terrorism is highly controversial, it is generally
accepted that terrorism is use of violence for political gain or ideological or ethnic
struggle by such groups as separatists, freedom fighters, liberators, militants,
paramilitaries, guerrillas, rebels, jihadists and mujahidin’s or fedayeens1 . Acts of
terrorism can be committed by individuals acting alone or carried out by groups of
clandestine or semi-clandestine actors outside the framework of legitimate wars through
their psychology and social circumstances, regardless of religion and nationality.
(Substances, 2009)

ƒ Academic consensus definition: Terrorism is an anxiety-inspiring method of repeated

violent action, employed by (semi-) clandestine individual, group or state actors, for
idiosyncratic, criminal or political reasons, whereby – in contrast to assassination – the
direct targets of violence are not the main targets. The immediate human victims of
violence are generally chosen randomly (targets of opportunity) or selectively
(representative or symbolic targets) from a target population, and serve as message
generators. Threat – and violence-based communication processes between terrorist
(organization), (imperiled) victims, and main targets are used to manipulate the main
target (audience(s)), turning it into a target of terror, a target of demands, or a target of
attention, depending on whether intimidation, coercion, or propaganda is primarily
sought( Schmid, 1988 ).(Substances, 2009)

3.3 Combating financing terrorism in Somalia

While Somalia has made progress towards fighting al-Shabaab, the country faces many
governance challenges which undermine these efforts. After the fall of the Siad Barre

22
regime in 1991, the country went into a turbulent civil war. The Islamic Courts Union
(ICU) was formed and attempted to curtail the lawlessness. The Transitional Federal
Government came into power from 2004 until 2012, when it was replaced by the current
Federal Government of Somalia (FGS). The FGS has partnered with the US and has
continued to attempt to regain control of the country and advance its counter-terrorism
efforts.131 The FGS made moves to strengthen the capacity of the Somali Police Force,
for instance, in criminal investigation and counter-terrorism operations. In 2016, the
AML/CFT Act was enacted in Somalia. The act outlined many policies specifically
dealing with banking. This included policies to prevent anonymous accounts, and to
allow monitoring of transactions. The act includes reporting obligations, to name a few.
In terms of reporting obligations, banks and other reporting entities are to notify the
Financial Reporting Centre if funds are suspected to be related to terrorism, terrorist acts,
or terrorist organisations, in addition to any transactions over $10,000.132 The act also
outlines civil and criminal penalties as well as seizure and confiscation orders. Somalia is
far off, however, in terms of legislation that specifically targets financing terrorism. In
fact, legislation and prosecutions in Somalia are very rare. There was one recent case
focused on the financing of an al-Shabaab attack. Numerous charges were filed against a
manager of the Eastleigh branch of the Diamond Trust Bank and an M-Pesa outlet owner
178 V MARKOVIC for their connection to the funds used in the DusitD2 Luxury Hotel
attack mentioned above which killed 21 in January 2019.133 The bank manager was
charged for failing to follow regulations and flag the suspicious transactions made
through the bank branch.134 The M-Pesa dealer in Eastleigh was also charged with
transmitting funds to the attackers through the Diamond Trust Branch.135 Several others
were charged for providing funds to al-Shabaab militants in the DusitD2 attack as well,
although most deny the charges.136 One early step in an attempt to regain stability in the
Horn of Africa was the creation of AMISOM, in January 2007. It was formed as a
regional peacekeeping mission operated by the African Union.137 AMISOM is still
operational in Somalia today and has assisted the Somali National Army, with backing
from the US, to reclaim key sections of Somali territory outside of Mogadishu and thus
prevent the easy flow of improvised explosive devices into Mogadishu.138 Even with the
military pressure from AMISOM and US forces, and the loss of some territory as part of

23
the efforts of the Somali National Army, however, alShabaab is still largely able to run
operations unabated. Other external partnerships include Somalia’s membership in the
earlier-mentioned MENA-FATF. This effort follows the FATF 40 Recommendations on
Combating Money Laundering and Financing of Terrorism and Proliferation, which is a
non-binding guidance that focuses on targeting areas where money launderers, terrorists,
and criminals conduct their illicit financial transfers.139 Somalia is also part of a Staff-
Monitored Program (SMP) through the IMF. An SMP is an informal agreement between
the government and IMF staff to monitor implementation of economic programmes in the
country. In Somalia’s first SMP review in February 2019, besides focusing on
implementation of economic programmes in the country, there was also review of the
Central Bank of Somalia and its implementation of AML/CFT regulations.140 This
section has focused on the capabilities of Nigeria and Somalia to target terrorist
financing. Each country has some legislation meant to curtail the ability of terrorist
groups to raise funds, but both states face great obstacles in meeting this goal. The
following section will identify some of the gaps in the fight to counter terrorist financing
in Nigeria and Somalia.(Markovic, 2021)

3.4 Financing of terrorism offences special Somali AML CFT AC 2016

Art.3:Any person who by any means, directly or indirectly, provides or collects funds, or
attempts to do so, with the intention that they should be used or in the knowledge that
they are to be used in whole or in part for any purpose:

a. In order to carry out a terrorist act; or

b. By a terrorist; or

c. By a terrorist organization that commits an offence; or

d. To finance a foreign terrorist fighter.

2. An offence under subsection (1) is committed:

a. Even if a terrorist act does not occur or is not attempted;

b. Even if the funds were not actually used to commit or attempt a terrorist act; and

24
c. Regardless of the state or territory in which the terrorist act is intended to occur.

3. It shall also be an offence to:

a. Participate as an accomplice in an offence within the meaning of subsection(2); 10

b. Organize or direct others to commit an offence within the meaning of subsection.

c. Intentionally contribute to the commission of an offence under subsection (2) by a

group of persons acting with a common purpose, where the contribution is to further the
criminal activity or purpose of the group that includes the commission of an offence
under subsection (2) or where the contribution is made knowing the intention of the
group is to commit an offence under subsection (2).

The intent and knowledge required to prove the offence of financing of terrorism may be
inferred from objective factual circumstances

. The statute of limitation for the offence of terrorist financing is 10 years from the time
the offence was committed. The limitation can be disrupted by initiating investigation,
including by charging the suspected person.(Laundering, 2016)

3.5 Main Terrorist Funding Sources

While international organizations and states are increasing their CFT efforts, which do
not yet include sufficiently innovative strategies, terrorist organizations are adapting
themselves easily to new funding techniques and sources. (Napoleoni 2006: 60-61)
Terrorism is funded from various sources and in many different ways. The methods and
sources used vary from country to country or region to region as well as terrorist groups
to terrorist groups. Especially in the past, one way of funding terrorism was the support
provided by states. However, as a result of the constant response of the international
community, especially of UNSC resolutions authorizing economic sanctions used to
persuade state sponsors, such as Libya and Sudan, to stop their support for terrorism,
state sponsorship of terrorism has diminished significantly. (Hardoin/Weichhardt
2003:11; Clunan 2006-7:574; Bantekas 2003:316) 6 With the decline of the state
sponsorship, instead of decreasing their activities, terrorists turned towards and relied
increasingly on private financing. Bantekas classifies, as this paper does, the private

25
terrorism funding into two categories on the basis of their origin: illegal funds and
legitimate funds. (Bantekas 2003:316; Clunan 2006-7:575; Samy 2006: 5-6) The second
main source of financing comes from a great variety of criminal actions, such as
smuggling, almost all kinds of fraud,7 theft, stolen cars, drug trafficking, kidnapping,8
robbery,9 extortion, petty crime, ID theft, money laundering, and smuggling of money.10
Besides illegal funding activities, legal sources are also being used for the financing of
terrorism. (Heroin/Weichhardt 2003:11) Legitimate businesses are used by terrorist
groups and their supporters either to raise funds in support of logistic and operational
requirements or to cover some activities of terrorist groups and as a front for money
laundering. (Chandler 2005: 3) The abuse of some charities constitutes another legitimate
terrorist funding source.11 Possible indirect fund transfers to terrorists from local
authorities under the umbrella of legitimate business, doorto-door requests, personal
donations, cultural events indirectly organized by terrorist groups, investments in stocks,
real estate, sale of publications, appeals to wealthy members of the community, collection
of membership dues can also be exemplified for the financing of terrorism in the sense of
legitimate funding. In order to move funds, terrorists have been using formal banking
systems. As a result of the considerable steps that have been taken to supervise and
monitor the money transactions through formal banking, this kind of movement of funds
has been declining. However, especially the existence of off-shore financial centres with
lax regulations still makes the formal banking system vulnerable to facilitation of the
movement of funds across international borders. (Samy 2006:9) Besides using the formal
banking system, especially through proxy account holders, terrorists predominantly have
been using informal value transfer (IVTs) methods, such as hawala. 12 Another method
of moving money, heavily used recently by terrorists, as it is seen as the most secure way
of avoiding detection, is the utilization of cash couriers. There are numerous ways of
travelling with large quantities of cash without raising suspicion at the border check
points. In fact terrorists do not necessarily have to cross borders. As was highlighted by
the London attacks, terrorists have increasingly used domestic sources in planning and
funding attacks.13 (Kaplan 2007; Napoleoni 2006:6) Terrorists’ continuous mutation,
which generally keeps them a step ahead of the states authorities in raising and

26
transferring money makes the CFT efforts to track the funds extremely difficult.
(Napoleoni 2006:1)(Against & Review, 2008)

3.6 International Initiatives to Counter the Financing of Terrorism

To evaluate the effectiveness of multilateral counter-terrorist financing cooperation, this

paper briefly takes a look at the evolution and development of some international
initiatives in this field. There are many legal instruments and tools to ensure that
governments have the necessary framework on which to base their measures to counter
the financing of terrorism. The first concrete step taken by the UN in October 1999 was
the adoption of UNSCR 1267.14 By this Resolution, the UNSC basically called upon the
Taliban regime to turn Osama bin Laden over without further delay because of his
indictment in the United States for the bombings of the US Embassies in Kenya and
Tanzania in 1998, and called on all member states to freeze funds and other financial
resources of the Taliban and Al-Qaeda, and associated entities and individuals. It also
established a Sanctions Committee,15 to monitor and oversee the implementation of
sanctions on Taliban-controlled Afghanistan. Pursuant to its mandate, the Sanctions
Committee created and maintains a Consolidated List.16 The list, containing
approximately 500 names together with delisted individuals and entities, is the basis of
the implementation of the sanctions against the Taliban and Al-Qaeda.

Although it is less known, the UNSC actually became actively involved in the global
effort against Al-Qaeda nearly two years before the attack of 9/11. After the passage of
UNSCR 1267, The International Convention for the Suppression of Financing of
Terrorism was adopted by the UN General Assembly in December 1999.18 This
Convention obliges its states parties to take appropriate measures for the identification,
detection, freezing, or seizure of any terrorist-related funds as well as proceeds derived
from the offences stated in Article 2. It also creates the offence of providing or collecting
of funds that are to be used to carry out any terrorist act. However, the Convention has no
any international enforcement mechanisms attached to it and applies only to its states
parties. (McCulloch/Pickering 2005:476; Bantekas 2003: 325) In the aftermath of 9/11,
the international approach to CFT changed considerably and international initiatives have
also been extended. Two weeks later, on 28 September 2001, under Chapter VII of the

27
UN Charter, “expressing its clear intention to do something significant to stem terrorist’s
access to financial support”, the UNSC unanimously adopted UNSCR 1373 which
addresses directly the financing of terrorism. The Resolution, legally binding on all UN
Member States, requires all members to suppress the financing of terrorism, to
criminalize active or passive support for terrorists prior to a terrorist act, freeze funds
expeditiously, share operational information, take necessary steps to prevent the
commission of terrorist acts, deny safe heaven to financiers, planners, and supporters, and
provide technical assistance to enhance multilateral cooperation in that field. The
resolution also calls upon Member States to sign the UN Convention for the Suppression
of the Financing of Terrorism and establishes an “innovative process to implement the
terms of the resolutions under the guidance of the Counter-Terrorism Committee (CTC)”
(Joyner 2004: 240-241; Biersteker/Eckert 2007b: 4-5; Oudrat 2004:162) The CTC’s
ultimate aim is to increase the ability of the States to fight against terrorism. Resolution
1373 targets all terrorists and terrorist organizations. But this sanctions regime does not
contain any listing or de-listing procedure: the list making has been left to the Member
States. Another important and influential inter-governmental “policy-making body”,
dealing with CFT, is the OECD’s Financial Action Task Force (FATF), created by the G-
7 in 1989 and comprising 33 Member States. The aim of the FATF was to examine the
money laundering techniques and trends, review the action which had already been taken
at a national or international level, and set out the measures that still needed to be taken to
combat money laundering. Less than one year after its establishment, a report containing
a set of 40 Recommendations, providing a comprehensive plan of action needed to fight
against money laundering, was issued by the FATF. In order to promote the national and
international policies to combat money laundering, the FATF has continued to examine
the methods used to launder criminal proceeds and has completed two rounds of mutual
evaluations of its member countries and jurisdictions, and a third round of mutual
evaluations has been commenced. It began a campaign of “naming and shaming”
jurisdictions that did not cooperate in the global counter money laundering. This
campaign prompted many of those named to change their legislation in order to be
removed from the list. (Clunan 2006-7: 577)19 After 9/11, moving beyond its focus on
money laundering by the adoption of 9 Special Recommendations on terrorist financing,

28
the FATF added the development of standards in the CFT to its mission.20 The FATF’s
recommendations are seen as “extremely persuasive soft law” with effect not only for its
member states, but also nonmember states. (Bantekas 2003: 319) The IMF and World
Bank developed technical assistance programs for countries to ensure compliance with
the FATF’s anti-money laundering and CFT recommendations, as well as the inclusion of
anti-money laundering considerations in their country evaluations.21 (Clunan 2006-7:
579) Beyond these international activities some regional and sub-regional organizations,
such as the EU, the African Union, the Gulf Cooperation Council, the South Asian
Association for Regional Cooperation, the Association of Southeast Asian Nations and
the Pacific Islands Forum, the Egmount Group have also taken an active role in CFT by
endorsing UN and FATF measures. (Bantekas 2003:319)(Against & Review, 2008)

3.7 Evaluation of the Effectiveness of the International Initiatives

In order to assess the international CFT initiatives, some indicators should be taken into
account: legal compliance, the number of states that have signed the UN convention,
financial intelligence units (FIUs) created, increased reporting, or international bodies
joined, the amount of national and global asset freezes, technical assistance programs run
and more importantly the degree to which states have changed domestic policies to be in
compliance with the new international standards. (Clunan 2006-7: 578; Biersteker
2007b:16) In terms of legal compliance, most countries have shown important progress
on criminalizing the wilful provision of funds for terrorism and providing a legal basis for
the expeditious freezing of the funds of terrorist organizations and individuals. Only three
UN Member States had a legal basis to freeze funds quickly by 2004.22 However by late
2005, the act of financing of terrorism was criminalized in 123 UN Member States. Most
states have reported changes in their administration to deal with terrorist financing; FIUs
or other intra-governmental mechanisms to address the issue have been established for
the first time in many countries. The total number of global member FIUs, informal trans-
governmental networks to share information regarding money laundering and terrorist
financing reached 102 in 2006.23 Many countries have introduced new reporting
procedures for banks and financial institutions, particularly “know-your-customer”
provisions and reports on suspicious transactions. But few states have introduced

29
measures to regulate charities, other than registration. (Biersteker, 2007b: 16-18) The
World Bank and the IMF agreed to provide technical assistance to ensure compliance
with the FATF’s recommendations and inclusion of anti-money laundering
considerations in their country evaluations. (Clunan 2006-7:579)24 Regarding the
enforcement, as it is declared by Wayne, approximately $147.4 million had been frozen
internationally and $65 million seized in assets internationally as of 13 July 2005.25 Most
of this money belonged to the Taliban regime and some $59 million seemed to be
associated directly with Al-Qaeda. (Comras 2005: 8)26 According to the UN High-level
Panel Report,27 “attempts to address the problem of terrorist financing have been
inadequate. While in the three months after 11 September 2001 $112 million in alleged
terrorist funds were frozen, only $4 million were frozen in the two years that followed.
Seized funds represent only a small fraction of the total funds available to terrorist
organizations. While many states have insufficient anti-money laundering laws and
technical capacity, the evasion techniques of terrorists are highly developed and many
terrorist funds have a legal origin and are hard to regulate.” With regard to the sanctions
imposed by the UNSC and the work of its CTC, as it was noted by the High-level Panel,
although those initiatives have played an important role in ending the support of some
states for terrorism and activating other states in CFT, the sanctions against AlQaeda and
the Taliban are still waiting for effective support and implementation from Member
States. Throughout the world there has been important progress in domestic policies on
the global willingness at the declaratory level to do something on CFT. However,
material progress to date has been relatively modest and superficial. (Clunan 2006-7:579;
Biersteker 2007b:20(Against & Review, 2008)

3.8 Main Challenges

Although the above-mentioned multilateral initiatives to some extent stimulate changes

on the national level, still there have been some challenges to further progress and even
some weakening of the current efforts in CFT through multilateral efforts. The first
challenge to the effective CFT cooperation is the existence of ongoing state capacity
limitations to apply the global counter-terrorist financing standards. Although the
capacitybuilding and technical assistance initiatives of the UN CTC and some other

30
bodies have been addressing this and some progress has been achieved on the general
capacity, there are still many gaps regarding some specific requirements of the UN and
FATF measures. (Biersteker 2007b: 21; Oudraat 2004:163) Despite the fact that many
states accept the global legal standards; the lack of political will to implement those
standards in some states is the second constraint to the effectiveness of multilateral
efforts. The third challenge relates to human rights concerns about the existing UN listing
and delisting procedures. These concerns have caused a general perception that the
current procedures are not adequately “fair and clear”. (Biersteker 2007b: 21-22)29 There
are some questions regarding these procedures awaiting to be answered such as: “What
happens if an individual or entity is wrongly listed? How are their rights protected?” in
the framework of the basic universal human rights and democratic principles. Instead of
the “innocent until proven guilty” basic criminal law principle, this procedure changes it
and follows the “guilty until proven innocent” idea.

Beyond the legal challenges there are some implementation concerns arising from the
listing procedure. To implement freezing actions some countries need further evidentiary
requirements. The lack of sufficient identifiers is another concern hampering the
implementation and enforcement of sanctions and affecting the rights of innocent people
with names similar to those listed.32 Most countries have failed to take steps against
business and other income-producing assets that are in the hands of identified Al-Qaeda
supporters. Another important problem relates to implementation of these sanctions on
the businesses and assets that are owned and administered jointly with non-designated
persons. They cannot also be implemented either on those Al-Qaeda members who are
not included on the list, although many of them are well-known in some countries.
(Comras 2005:10) Biersteker argues that the variation in the capacity of private sector
banks and financial institutions around the world is another challenge to the effectiveness
of the multilateral initiatives. Since larger financial institutions are better able to comply
and manage the additional costs associated with compliance with reporting on terrorist
funding, they have more competitive advantages than the smaller ones.33 Another
particular challenge “upon the UN-led efforts to suppress terrorist financing is the
capacity and willingness of Member States to prepare the numerous reports to UN bodies
that they are increasingly asked to provide … Small Member States from the developing

31
world with limited institutional capacity often have great difficulty keeping up with the
demands of successive rounds of reporting.” The sixth and final challenge which is
specific to the UN is the institutional lassitude and bureaucratic delay within the
organization. (Biersteker, 2007b: 24-27)(Markovic, 2021)

3.9 Institutional measures in the private sector

Some of the first measures in AML/CTF focused on controlling the flow of money
worldwide to reduce risks of illicit transactions were implemented by the Basel
Committee on Banking Supervision in 1988 (Basel I).76 This involved the creation of the
‘Know Your Customer’ (KYC) model, which was subsequently added to the 40
Recommendations of the Financial Action Task Force (FATF), the intergovernmental
body that sets global AML standards, and the development of Customer Due Diligence
(CDD) in the banking sector.77 The KYC requirements were meant to focus not only on
the physical identification of clients, but also on monitoring subsequent transactions.78
The FATF suggests, for example, that financial institutions should use CDD when
transactions are above a designated monetary threshold, or when there is suspicion of
money laundering or terror financing activities.79 This could include wire transfers and
the use of money or value transfer systems or other new technologies. Some financial
institutions use suspicious activity reporting to create a record of potential impropriety.80
Financial institutions are also involved in other preventive measures. This can include
different measures for specific customers or activities or countries; some transactions
may be considered to be high-risk, such as those involving politically exposed persons,
those using cross-border correspondent banking, or those involving high-risk countries.81
Other policies involve the regulation of those providing money or value transfer services
(MVTS) and the use of new technologies as delivery mechanisms. Although transporting
currency via bulk cash couriers is a popular method, other groups have used MVTS
which are not tightly regulated currently, or pre-paid cards which are many times not
bank-based.82 These MVTS’s play an important role globally, but particularly in Nigeria
which accounts for a third of the remittances in all of Africa.83 Monitoring these other
systems is also important since the economies of some African sub regions are mostly
cash-based, with only an estimated 12% holding bank accounts.84 Such additional

32
measures as those noted above can tighten the safeguards offered by private financial
institutions(Markovic, 2021)

3.10Operational measures

The fight against terror financing must include a multi-pronged approach with many
sectors and organisations working together. These operational measures can include
establishing financial intelligence units (FIUs) that would receive suspicious activity
reports from financial institutions.89 The FIU should have political support to be able to
achieve full potential, while also being accepted as part of law enforcement and
intelligence structures.90 A fully operational FIU may provide a much-needed bridge
between the public and private sectors.91 Law enforcement agencies must also be given
powers to be effectively involved in the framework of AML/CFT. This may require
additional training to hone investigative methods such as ‘undercover operations,
intercepting communications, [and] accessing computer systems’. 92 In the US, the
PATRIOT Act of 2001, also a response to 9/11, provided national law enforcement
agencies with new tools to detect and prevent terrorism – tools that were ‘already
available to investigate organized crime and drug trafficking’, including access to
information on suspicious financial transactions. (Markovic, 2021)

3.11THE PROBLEM OF TERRORIST FINANCING

Terrorist financing incorporates two distinct sets of financial activities. One set involves
the provision of the funds required to carry out a terrorist operation. It includes funds to
pay for such mundane items as food, lodging, transportation, reading materials, and
audio-video equipment, as well as purchases of legal precursors for bomb making (the
2004 Madrid bombings relied on cell phones as detonation triggers, and the 2005 London
bombs were homemade from legal ingredients), as well as purchase of illegal materials
for operations. Such transactions, unlike money laundering, are mainly “pre-crime”: they
are perfectly legal until they can be linked to support for a criminal act.2 they are also
minute in terms of monetary value and therefore extremely hard to detect in the absence
of other indicators regarding the identity of the persons involved. Such identity profiles
raise a number of legal and civil liberties issues.3 The second set of terrorism-related
financial activities involves the raising of funds to support terrorist operations, training,

33
and propaganda. Funds can be raised through illicit means, such as drug and human
trafficking, arms trading, smuggling, kidnapping, robbery, and arson, which are more
amenable to traditional anti-money-laundering tools. Terrorists also receive funds from
legitimate humanitarian and business organizations. Charities raising funds for
humanitarian relief in war-torn societies may or may not know that their funds are going
to terrorism. Corrupt individuals at charities or at recipient organizations may divert
funds to terrorist organizations. This appears to be one of the main means through which
al Qaeda raises funds. Legitimate funds are commingled with funds destined for
terrorists, making it extremely difficult for governments to track terrorist finances in the
formal financial system. The difficulties inherent in tracking terrorist finance in the
formal financial system are multiplied many times over as terrorists move to informal
financial systems, using money remitters and hawaladars, who, in turn, may engage in
trade-based money laundering.4 Al Qaeda began relying on the informal financial system
around 1996. Detecting terrorist finances is therefore an extremely difficult task, more
difficult even than preventing money laundering(Anne, 2006)

3.12The Importance Of Combating Terrorism Financing

To stop terrorism, it is essential to combat the financing of terrorism. Terrorism needs

money. Weapons and the maintenance of weapons are major expense (Madinger 2012).
Security costs including false identification and other concealment mechanisms require
money. Communications and the grooming of personnel’s can be costly. The same can be
said to setting up and maintaining training camp. The threat of terrorism can be surprising
as it can inflict the largest amount of damage using minimum cost. While there are many
terrorist-financing methods, Madinger (2012) noted that there are four main sources; (1)
criminal activity, (2) charitable contributions and donations, (3) legitimate or semi
legitimate business and (4) government or state sponsorship. Stereotyping and
generalization is a common mistake in combating terrorism. For example, if a terrorist is
exposed to use a conventional banking system, should the entire conventional banking
system be implicated with terrorism financing? The logical answer will be no.
Unfortunately, when it comes to terrorism and the financing of terrorism, it is common
for Islamic charities and Islamic financial institutions to be suspected and discriminated

34
based on bias. This is a serious mistake since Islamic charities and Islamic financial
institutions are friends and partners in combating terrorism. Islamic charities focus on
humanitarian issues while Islamic financial institutions are operated and led by friendly
moderates on professional basis. Islamic finance encourages ethical financing and the
eradication of unfair practices. This is beneficial to all. Alternative remittance systems are
the norm in countries where formal banking is poorly established as it provides
communitybased and cost-effective financial services based on trust and cooperation,
rather than profit and competition. The targeting of informal remittance systems as a
whole under the disguise of combating the financing of terrorism measures will leave
poor people with no means to send money to families in serious financial need. There is
no clear evident to prove that prohibiting informal remittance system will prevent
terrorism financing. Below are some of the possible red flag as stated in one of the
guidelines issued by the Central Bank of Malaysia: x Unusual account transactions that
are inconsistent with past deposits or withdrawals style such as cash, cheques, wire
transfers, etc. x Transactions involving a high volume of incoming or outgoing wire
transfers, with no logical or apparent purpose that come from, go to, or transit through
locations of concern, that is sanctioned countries, non-cooperative nations and
sympathizer nations. x Unexplainable clearing or negotiation of third party cheques and
their deposits in foreign bank accounts. x Wire transfers by charitable organisations to
companies located in countries known to be bank or tax havens. x Structuring at multiple
branches or the same branch with multiple activities. x Corporate layering, transfers
between bank accounts of related entities or charities for no apparent reasons. x Lack of
apparent fund raising activity, for example a lack of small cheques or typical donations
associated with charitable bank deposits. x Using multiple accounts to collect funds that
are then transferred to the same foreign beneficiaries Transactions with no logical
economic purpose, that is, no link between the activity of the organization and other
parties involved in the transaction. x Overlapping corporate officers, bank signatories, or
other identifiable similarities associated with addresses, references and financial
activities. x Issuing cheques, money orders or other financial instruments, often
numbered sequentially, to the same person or business, or to a person or business whose
name is spelled similarly(Anne, 2006)

35
 CHAPTER FOUR

CONCLUSION AND RECOMMENDATION

4.0 INTRODUCTION

This chapter presented the conclusion and recommendation of the study.

4.1CONCLUSION

To find specific information about the current efforts of the Financial Reporting Center
(FRC) in Somalia to combat financial crime. However, it is important to note that
Somalia has been working towards improving its financial transparency and combating
money laundering and terrorist financing. Here are some key points to consider:

International Efforts: Somalia has been engaged with international bodies like the
Financial Action Task Force (FATF) and the United Nations in addressing financial
crime. The FATF has not yet conducted a mutual evaluation of Somalia's anti-money
laundering and counter-terrorist financing standards.

Informal Financial System: Somalia's financial system is primarily informal, operating

outside of government oversight. This includes the use of unsupervised money remittance
firms known as hawaladars. The reliance on remittances from the Somali Diaspora plays
a significant role in the country's economy, with an estimated $1.3 billion sent annually].

36
Reforms and Initiatives: The Central Bank of Somalia has implemented reforms to
improve fiscal transparency and build a nascent banking sector. These reforms include
granting interim licenses to banks and money transfer organizations, implementing a
Treasury Single Account, and developing procedures for banking supervision .

Challenges: Somalia faces challenges in controlling its borders and customs points, which
contributes to smuggling of currency and goods. Corruption is also a significant issue,
providing opportunities for money laundering. Additionally, terrorist groups like al-
Shabaab generate funds through various illicit activities, including taxation, extortion,
and involvement in the charcoal and sugar trade .Strengthen Regulatory Framework:
Enhance and enforce laws and regulations related to anti-money laundering (AML),
countering the financing of terrorism (CFT), and combating the financing of proliferation
(CFP). This includes implementing robust Know Your Customer (KYC) procedures,
customer due diligence (CDD), and suspicious transaction reporting (STR) requirements.
Enhance Financial Intelligence Units (FIUs): Establish or strengthen FIUs to facilitate the
collection, analysis, and dissemination of financial intelligence to combat financial crime
effectively. FIUs play a crucial role in identifying and investigating suspicious
transactions. Promote International Cooperation: Foster collaboration and information
sharing among domestic and international law enforcement agencies, financial
institutions, and regulatory bodies. This includes exchanging intelligence, coordinating
investigations, and supporting mutual legal assistance requests. Conduct Risk
Assessments: Regularly assess the risks associated with money laundering, terrorist
financing, and proliferation financing. This helps identify vulnerabilities and prioritize
resources for prevention, detection, and enforcement efforts. Implement Effective
Supervision: Strengthen the supervision of financial institutions, including banks, money
service businesses, and virtual asset service providers. Supervisors should conduct
regular inspections, assess compliance with AML/CFT regulations, and impose
appropriate sanctions for non-compliance.Enhance Training and Awareness: Provide
comprehensive training programs for financial institutions, regulators, law enforcement
agencies, and other relevant stakeholders. This ensures that they are equipped with the
necessary knowledge and skills to detect, prevent, and report suspicious
activities.Embrace Technology: Leverage technological advancements, such as artificial

37
intelligence, machine learning, and data analytics, to enhance the effectiveness and
efficiency of AML/CFT efforts. This includes implementing robust transaction
monitoring systems and utilizing data-driven approaches for risk assessment.

Effective anti-money laundering (AML) and countering the financing of terrorism (CFT)
policies and measures are crucial for maintaining the integrity and stability of the
international financial system. These crimes, including money laundering, terrorist
financing, and the financing of the proliferation of weapons of mass destruction, can have
significant economic effects, such as destabilizing financial sectors, ineffective revenue
collection, and reputational risks for international financial centers [1].

The Financial Action Task Force (FATF) plays a key role in establishing international
standards for AML/CFT and identifying jurisdictions with deficiencies in their
AML/CFT regimes. The FATF regularly updates its lists of jurisdictions under increased
monitoring and high-risk jurisdictions subject to a call for action. Financial institutions
should consider the FATF's stance towards these jurisdictions when reviewing their
obligations and risk-based policies .

In the United States, the Department of State emphasizes the importance of combating
money laundering and terrorist financing. Money laundering involves making the
proceeds of criminal activity appear legal, and it is estimated that criminals launder
trillions of dollars globally. The United States, along with international organizations like
the IMF and World Bank, recognizes the need to address these issues to maintain the
integrity of the financial system.

Overall, the fight against money laundering and terrorist financing requires ongoing
vigilance, cooperation between countries, and the implementation of robust AML/CFT
policies and measures. By effectively combating these crimes, we can protect the
integrity and stability of the international financial system and contribute to global
security.

4.2 RECOMMENDATION

38
Based on the search results, I couldn't find specific information about recommendations
for combating financial crime in FRC. However, I can provide you with some general
recommendations for combating financial crime that can be applied in any jurisdiction,
including FRC.

Strengthen Regulatory Framework: Enhance and enforce laws and regulations related to
anti-money laundering (AML), countering the financing of terrorism (CFT), and
combating the financing of proliferation (CFP). This includes implementing robust Know
Your Customer (KYC) procedures, customer due diligence (CDD), and suspicious
transaction reporting (STR) requirements.

Enhance Financial Intelligence Units (FIUs): Establish or strengthen FIUs to facilitate the
collection, analysis, and dissemination of financial intelligence to combat financial crime
effectively. FIUs play a crucial role in identifying and investigating suspicious
transactions.

Promote International Cooperation: Foster collaboration and information sharing among

domestic and international law enforcement agencies, financial institutions, and
regulatory bodies. This includes exchanging intelligence, coordinating investigations, and
supporting mutual legal assistance requests.

Conduct Risk Assessments: Regularly assess the risks associated with money laundering,
terrorist financing, and proliferation financing. This helps identify vulnerabilities and
prioritize resources for prevention, detection, and enforcement efforts.

Implement Effective Supervision: Strengthen the supervision of financial institutions,

including banks, money service businesses, and virtual asset service providers.
Supervisors should conduct regular inspections, assess compliance with AML/CFT
regulations, and impose appropriate sanctions for non-compliance.

Enhance Training and Awareness: Provide comprehensive training programs for financial
institutions, regulators, law enforcement agencies, and other relevant stakeholders. This
ensures that they are equipped with the necessary knowledge and skills to detect, prevent,
and report suspicious activities.

39
Embrace Technology: Leverage technological advancements, such as artificial
intelligence, machine learning, and data analytics, to enhance the effectiveness and
efficiency of AML/CFT efforts. This includes implementing robust transaction
monitoring systems and utilizing data-driven approaches for risk assessment.

Promote Public-Private Partnerships: Governments should foster collaboration between

public and private sectors to enhance the effectiveness of anti-money laundering and
counter-financing terrorism measures. Financial institutions, law enforcement agencies,
and other relevant stakeholders should work together to share information, identify
emerging risks, and develop innovative solutions.

Strengthen Financial Intelligence Units (FIUs): Countries should establish and strengthen
their FIUs, which serve as the central national agencies responsible for receiving,
analyzing, and disseminating suspicious transaction reports and other financial
intelligence. FIUs play a crucial role in detecting and investigating money laundering and
terrorist financing activities.

40
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Laundering, A. (2016). FEDERAL REPUBLIC OF Anti-Money Laundering and

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XLIII