The New Economy of Terror
By Loretta Napoleoni, author of Modern Jihad: tracing the Dollars behind the Terror Networks
1 December 2003

In the early 1990s, when I interviewed the Red Brigades for my PhD, I discovered that their daily life was ruled by economics. Members of the organization spent most of their time raising money to carry out their violent attacks, to buy weapons, to rent new safe houses. At that time I also discovered that European and Middle Eastern armed organizations were linked to each other. The Red Brigades, for example, often sailed to Lebanon to pick up arms from the PLO. The weapons were them brought to Sardinia where other European groups, such as the IRA and ETA, came to collect their share of the cargo. For this service the Red Brigades received a fee.

Just to give an idea of the vast amount of money required by an armed organization to function, in the 1970s, the Red Brigades had a turnover of $8 to 10 million, equivalent to about $100 million today. This figure was equivalent to the turnover of a medium size Italian company. Generating such vast flow of money required constant attention and absorbed the bulk of the time of the full time members of the organization.

I became so interested in the economics of terrorism that I even tried to change the topic of my PhD. For years I approached universities and foundations to finance my research, but it was only after 9/11 that I managed to get a book contract.

I believe that the reason why I was unable to stimulate some curiosity in the economics of terrorism lies in the lack of interest towards this subject in the 1990s. This is also one of the main reasons why, even today, very little is known about how armed organizations fund themselves. Although during the last two years a lot of resources have gone to study this phenomenon, there is still a limited knowledge of the economics of terrorism. In part, the failure of the war on terror to end the threat of political violence is due to the lack of understanding of this phenomenon.

The economics of terrorism has its roots in the post-colonial process. To analyze this phenomenon, I retraced the birth and evolution of armed organizations since the end of World War II. What has emerged is the existence of an international economic system run primarily by armed organizations which I have defined the New Economy of Terror. This system underwent three main transition:

The State sponsored terrorism was common in the post war years and during the Cold War. Both superpowers fought war by proxy along the periphery of their sphere of influence funding armed groups. The Contras in Central America are a clear example of this type of funding. Via Cuba, the USSR trained Latin American Marxist groups, for example the Tupamaros, supplied them with weapons and expertise in guerrilla fighting. Very little differences existed between the two sponsors, the US often used cash, administered by the CIA, to fund its terror groups, it also used covert and legitimate sources; the Soviet were reluctant to use cash and preferred to train and arm Marxist groups, in Latin America they operated via Cuba and in the Middle East via various spin-offs the PLO.

The privatization of terrorism took place during the late 1970s early 1980s and coincided with the desire of armed organizations to gain independence from the sponsors and to meet the raising costs of terrorist activities. Armed groups developed strategies to self finance themselves. A mixture of legal and illegal activities constituted the core of their funding activities. The most successful organizations were the PLO, the IRA and ETA in Spain. The PLO, in particular, under Arafat was able to create the economic and social infrastructure of the Palestinian state without having a state. In Jordan, in Lebanon and in Gaza and the West Bank, the PLO acted as a legitimate state, for example it controlled the territory and levied taxes.

The globalization of terrorism took place in the 1990s, with the deregularization of the international financial markets. As economic and financial barriers came down, armed groups were able to become transnational, that is to raise money in more than one country and to operate cross border. Al Qaeda is a striking example of this phenomenon. Again a combination of legal and illegal activities, this time conducted at international level, is the core of its funding.

It was thanks to the deregularization of the international economic and financial markets that armed organizations were able to link up with each other and with the illegal and criminal economy. They began doing business with each other. The example of drug trade is particularly illuminating. From Afghanistan narcotics travel to Europe crossing countries where terror and criminal activity is strong, armed groups and criminal organizations participate in the business, in Chechnya drugs are carried across the country by Islamist armed groups while in Turkey the mafia take charge of it. 75% of all the narcotics which enters Europe transit via Turkey.

Today the New Economy of Terror has merged with the international illegal and criminal economy and together they have a turnover of $1.5 trillion dollars, higher than the GDP of the United Kingdom.

A break down of this economy shows the following:

The bulk of the $1.5 trillion flows into Western economies, it gets recycled in the US and in Europe. It is a vital infusion of cash into these economies.

What the West has done to Curb Terror Financing

In the months following 9/11 Western Governments were very active to truck terror money raised via charities in the West. Several charities were closed in the US, Canada and in Europe and their accounts were frozen. However, recent data from the State Department show that the total amount of money frozen world wide since 9/11 is only $156 million.

Financial conglomerates run by bankers friendly to bin Laden and Al Qaeda have also been targeted. The Al Barakaat and Al Tawqa banks, for example, were shut down. The Al Barakaat was a financial conglomerated from Somalia which run Hawala exchanges across the world. Its international yearly profits were about $500 millions of which bin Laden got a flat 5% fee. However, none of the main Saudi banks have been touched or asked to produce documentation to prove that they have not done any business with Islamist groups.

Very little has been done to stop private donations from businessmen who are supportive of Al Qaeda, for example bin Mahofouz, former head of the Saudi Commercial bank who has funded Far East charities who were fronts for bin Laden.

Why so little has been done to follow the money trail and to block the money flows of armed organizations? Because the real core of Islamist terror financing is not in the West but in the East. In 1990 bin Laden had issued a fatwa urging his followers to refrain from attacking Saudi Arabia because the revenues from the oil industry were needed to consolidate the Islamist revolution. Western leaders have jurisdiction only in the West, they have no control over Islamic banking and finance. This explains why the bulk of the money which has been frozen was in the West.

Cooperation with Muslim governments is needed in order to block terror financing, however this often proves very difficult to achieve. At the beginning of the summer, George Bush put pressure upon Saudi Arabia to clump down on terror financing. A recent UN showed that about 20% of Saudi GDP went to fund al Qaeda alone. Over the summer months the Saudis froze $5.6 million of charitable money, they stopped collection of coins in shopping malls and close 6 of the 241 charities. Bush was satisfied by such measures. In reality these were only symbolic gestures to appease US public opinion.

The other area which is directly related to funding terror is money laundering. The Patriot Act in the US has restricted the freedom of Americans to deal with the banks and financial institutions but it has not made it more difficult for foreign money to get laundered in the US. The US treasury still admits that 99% of the money which try to get into the US illegally does get through.

The core of the problem is offshore banking. Illegal, criminal and terror money travel via the offshore banking network, which is highly unregulated. The speculation prior to 9/11 was done via offshore banking, as admitted by the president of the Bundesbank. To stop this flow of funds, Western governments should change and eventually abolish offshore banking facility.

To summarize the constraints of Western government are:

Against this background, the war option, i.e. the invasion of Iraq, seemed a viable third route. The Bush administration believed that the war was going to be fast and relatively inexpensive. Clearly they had miscalculated it.

The war in Iraq played in the hands of Islamist terror groups for various reasons:

The rush in prices and wide availability has turned the US buy-back programme into a subsidy. Weapons can be sold to Americans for 10 times the price of the black market. Iraqis hand in one weapon and with the money they receive from the Americans they can buy 10 more in the black market.

Saddam legacy seems to be far from the Weapon of Mass Destruction, it may well rest upon its small arms arsenal which has become the life-line of the new phase of the Modern Jihad, the anti-American Jihad.

By Loretta Napoleoni