Funding terror

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Originally published 09:53 p.m., March 14, 2007, updated 12:00 a.m., March 15, 2007

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We are on the cusp of a new era of terror financing, that of mobile payments or "m-payments." An m-payment system is being developed by members of the GSM Association to enable migrant workers and the poor who do not have bank accounts to transfer money internationally, efficiently and inexpensively. According to the World Bank, 175 million migrants transferred at least $230 billion international remittances in 2005. Are Hamas, al Qaeda, Hezbollah and their likes far behind?

Soon, every mobile-phone owner will be able to send money, pay bills and make purchases anywhere, anytime. According to the GSM Association, 3 billion people have mobile phones, but only 1 billion people worldwide have bank accounts. BearingPoint, a major management and technology consulting company, estimated the unbanked marketplace in the United States alone in 2006 at $510 billion. No wonder that banks such as Citigroup, HSBC, JPMorgan Chase, BancorpSouth, as well as mobile phone companies such as Cingular, Verizon, Sprint and Vodafone, to name a few, are clamoring for a piece of the action.

Without the implementation of a real-time digital anti-money-laundering compliance framework, the m-payment system is well suited to become the "killer application" for money laundering and terror financing. All you need is a stored value card and m-payments enabled mobile phone and carrier.

There are now a dozen or so m-payment service providers. In the United States, Citigroup teamed up on Feb. 27 with Obopay, the mobile person-to-person payment service provider, thus enabling not only South American or Filipino migrant workers to avail themselves of the m-payments service, but also drug traffickers, and members of Hamas and Hezbollah in the United States to send money back to the Middle East, or to each other all over the world.

Many companies in Europe also provide such services. LUUP, a Norwegian company with offices in Germany and the United Kingdom, recently entered into an arrangement with the National Bank of Dubai. The emirate is a well-known conduit for al Qaeda, Hamas and Hezbollah funding.

In the United Kingdom, with more practicing Muslims than Christians, and in which Islamist terrorists recruit and plan terror attacks in radicalized mosques in Birmingham, Leeds and London, HSBC -- with more than 5,000 offices in 79 countries -- and its subsidiary First Direct -- a telephone- and Internet-based commercial bank, offer an m-payment solution over the Monilink worldwide Web network.

Stored value cards do not require a bank account or credit card to activate and use, nor do they require two forms of government-approved identification, just plain old cash. The majority of cards only allow low levels of cash to be held on the card, but some allow the transfer of thousands of dollars.

This is how it works: You buy a stored value card for X amount of dollars and a prepaid mobile phone. Next, you register with the m-payment service provider using a free anonymous e-mail account, your prepaid mobile phone number and the money on the stored value card. Using your mobile phone, you log on to the m-payment service provider and give them the number of the mobile phone to which you wish to transfer the funds from your stored value card. The m-payment service provider sends a message to the receiver's phone number asking where to transfer the money. The recipient can request the transfer to his stored value card and withdraw the funds from any ATM.

Since the Near Field Communication security technology (which is the basis of the m-payment system) features sophisticated encryption, it represents a formidable impediment to law enforcers and intelligence services trying to detect suspicious money transactions. The challenge is compounded by the fact that the m-payment process can leave little to no audit trail; perhaps, two mobile-phone numbers; the amount; and short and simple instructions on transmission and reception.

The task of detecting or interdicting terrorists or money launderers is made all the more daunting because often the phone and stored value cards are discarded after a relatively small amount of time and use, and others employed elsewhere in their stead.

Moreover, many stored value cards enable you to reload the card, thus enabling larger sums of money to flow through it. Ironically, among its major selling points is the anonymity it provides for the user, as well as its functional similarity to a credit or debit card.

A large number of major U.S. credit-card companies and banks now offer stored value cards. According to the National Drug Intelligence Center's National Drug Threat Assessment 2007, "the number of U.S.-issued Visa- and MasterCard-branded money remittance cards... increase• from 400,000 in 2005 to more than one million in 2006. In addition, more than 7 million MasterCard and Visa prepaid debit cards were in circulation."

While the U.S. government, concerned with the potential impact of reporting requirements on the day-to-day operations of electronic funds transfer systems, is conducting feasibility studies, the regulatory framework is not capable of dealing with the latest digital developments. To avoid the abuse of this new technology by criminals and terrorists, the government needs to adopt a sophisticated digital tracking system now, as well as put in place a digital system to report in real time on transfers and block the flow of illicit funds.

Rachel Ehrenfeld is director of American Center for Democracy. John Wood is president of the Playfair Group.

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