India: Are commodity markets funding terrorist activities?

Sreekumar Raghavan, Commodity Online

BANGALORE: Intelligence agencies still may not have the perfect answer as to how terrorist move their funds across borders. While it may be difficult to move funds across formal banking channels, it is likely that they may be using alternative, non-banking channels and commodities.

Several millions have been invested in US commod ponzi schemes none of which went into commodities-- CFTC has already taken action against many illegal operators but hasn't stated so far how the funds were utilized except in a few cases where they were used to buy luxury properties.

Global nature of money transactions through electronic means compounds the situation further although much of the assets of terrorists groups could also be held in such commodities as precious stones and gems.

The fact that there is real threat or possibility of commodity markets being used for financing terrorism is evident from the notices posted on Dubai Multi-Commodities Centre (DMCC) and US commodity markets regulator, Commodity Futures Trading Commission (CFTC).

DMCC has stated in its site that it is obligated to establish a set of policies to ensure that it does not finance terrorism or facilitate money laundering. It has also committed itself to support any domestic and international initiatives to combat financing of terrorism.

It was the bombing of World Trade Center in September 2001 that lead to a global call by USA for monitoring financing of terrorism activities. In USA, after the 9/11 incident, The Patriot Act was laws passed to prevent financing of terrorism through formal channels. It amended Bank Secrecy Act and is intended to strengthen U.S. measures to prevent, detect, and prosecute international money laundering and the financing of terrorism. These efforts include anti-money laundering (AML) tools that impact the banking, financial, and investment communities.

The CFTC website also has a notice to investors on safeguarding against financing of terrorism:

”Beware of promises of profits from commodity futures and options trading based on the events of September 11, 2001 and other public information relating to the war on terrorism.

Be alert to solicitations for transactions in commodity futures or options contracts based on claims that you can make a lot of money with little risk by trading in commodities affected by well-known current events, such as the attacks of September 11, 2001 and the war on terrorism.”

A US Government Accountabilty Office document of 2004 said that it faces several challenges in determining and monitoring the nature and extent of terrorists' use of alternative financing mechanisms.

Alternative financing mechanisms are outside the mainstream financial system and include the use of commodities (cigarettes, counterfeit goods, illicit drugs, etc.), bulk cash, charities, and informal banking systems to earn, move, and store assets.

In India, the Forward Markets Commission has set forth several pre-conditions for individuals or business entities to approving new commodity exchanges. But it is doubtful, how far the regulator and the exchanges have information regarding the source of funds flowing into commodities sector which continues to rise every month despite the recessionary trends and ban on Futures in some commodities.

The US Government must have spent close to $600 bn for financing its Global War on Terrorism. Since the September 2001 terrorist attacks, Congress has provided about $542.9 billion, as of May 2007, to the Department of Defense (DOD) for the Global War on Terrorism (GWOT), a GAO note observed.

U. S. energy needs rest heavily on ship-based imports. Tankers bring 55 percent of the nation's crude oil supply, as well as liquefied gases and refined products like jet fuel. This supply chain is potentially vulnerable in many places here and abroad, as borne out by several successful overseas attacks on ships and facilities. If Somali pirates can hijack with such ease, terror groups are much better equipped.

Many leading global organizations have come forward with binding instruments and recommendations to combat financing of terrorism, however, they fall short of providing any practical assistance to professional banks according to Mark Pieth editor of the book, Financing Terrorism.

Source: Commodity Online