Disrupting Non-Bank al Qaeda Finance: Gemstones, Gold and Hawala; Andrew (Andy) Magliochetti

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Disrupting Non-Bank
     al Qaeda
 Finance Activities
 Gemstones, Gold and Hawala
         Andrew R. Magliochetti
Introduction ................................................................................................................................ 2
A Brief History of AQ Finance .................................................................................................... 3
Asset Compression .................................................................................................................... 3
Gemstones ................................................................................................................................ 4
   Emeralds ................................................................................................................................ 4
   Tanzanite ............................................................................................................................... 4
   Diamonds ............................................................................................................................... 5
Gold ........................................................................................................................................... 6
Hawala ....................................................................................................................................... 7
Curbing al Qaeda Trade in Gemstones and Gold....................................................................... 9
Denying Access to Hawala........................................................................................................13
Conclusion ................................................................................................................................15
Works Cited ..............................................................................................................................15

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Gemstones, Gold and Hawala
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 “Money is the lifeblood of terrorist operations today. We’re asking the world to stop payment.”
                                   -President George W. Bush, September 24, 2001

The operational objective of al Qaeda (AQ) is to attack its enemies, and a complex series of
enabling activities (see Fig.1) and personnel must be maintained across the globe to achieve
this objective. This maintenance requires the expenditure of significant capital – estimates of
the annual cost to operate al Qaeda have been as high as $30 million - and a constant
replenishment of these financial resources (Rensselaer, 2002).

                                                     Figure 1
                        Al Qaeda Asymmetric Warfare Activities (Rudner, 2006)

                                 Support                   Logistics             Combat
                                   Marketing and

                                   Persuasion and                Sleeper Cell
                                     Incitement                  Maintenance
                                                                Procurement of

                                                                                   Target Assault
                                  Communications                (Documents and

As with any enterprise, the failure of any one component leads to a breakdown in the whole. If
the financial resources of AQ can be constrained, so would be the operational ability of the
entire network. In the financial war on AQ, the United States and its allies have traditionally
focused their considerable resources on the banking industry, state sponsors of terror and false
charity fronts. To be sure, the latter two have been the largest historical contributors to AQ’s
efforts. But, AQ is aware of the vulnerability and visibility of these sources and systems and has
shifted its tactics away from traditional means of illicit capital transference and money

It is estimated that the September 11, 2001 “planes operation” had a total cost to AQ of
$500,000. Put in other terms, that amount is equal in value to 40 ounces of gold or a single cut

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diamond and this operational cash could be available in hours anywhere on the planet – in any
currency - by a single call to a hawaladar.

The United States should continue to confront AQ finance as it has in the past, but also must
expand and adapt its strategies in response to AQ’s agility in modifying its tactics in capital
movement. This document addresses several of these tactics, how they can be countered and
suggestions to better track and interdict derivative AQ assets on the move.

A Brief History of AQ Finance
AQ traces its origins to 1982, when a young Usama bin Laden (UBL) and Palestinian sheikh
Abdallah Yussuf Azzam established Maktab al-Khidamat (the Mujahideen Services Bureau), for
the purpose of providing financial and manpower support to the Afghans in their efforts against
the Soviets. Leveraging family relationships and a vast network of donors, Maktab al-Khidamat
quickly established offices in more than 50 nations and put in place the initial infrastructure for
what would become the largest terror network in history.

Three months after the Soviet troop withdrawal from Afghanistan in May of 1988, UBL and
Azzam met with leadership from Egyptian Islamic Jihad to form what would later become al
Qaeda (Wright, 2006). AQ is unique among other terror and “revolutionary” groups in that it
possessed an extremely wealthy benefactor in UBL.

UBL’s personal net worth, prior to becoming an international fugitive, has been estimated in the
$250 million to $350 million range. This abundance of funding, along with its existing network of
benefactors traced back to the Maktab al-Khidmamat origins, allowed AQ to move into the
business of global terror without the problem of capital deprivation that usually besets most new
terror enterprises (Wright, 2006).

Following the August 7, 1998 US Embassy bombings in Nairobi,Kenya and Dar es Salaam,
Tanzania, AQ and UBL appeared on the radar of western intelligence organizations as a serious
threat, resulting in the seizure of more than $240 million of assets (Farah, 2004). This focus
increased with the USS Cole attack in October 12, 2000 and, following the events of September
11, 2001, escalated to a man- and money-hunt without modern precedent; the most
comprehensive, sweeping reform to anti-money laundering and privacy laws in the history of the
modern international banking was to occur.

As a result of these activities, AQ and UBL were forced to seek alternative means to store
capital and transmit the same to its operatives. Massive amounts of capital had to be removed
from the banking system and converted into mobile and untraceable commodities.

Asset Compression
Criminals and terrorists both recognize that the principal problem with cash is that it is bulky,
heavy and difficult to smuggle. One million US dollars in hundred dollar bills weighs
approximately 22 pounds and occupies 3.98 cubic feet – roughly the size of 24, packaged 12-
ounce cans. Operating with used bills adds to this problem; a circulated bill can gain 25% in
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Gemstones, Gold and Hawala
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weight due to absorption of dirt and moisture, and gain an even higher percentage in volume
(Mathers, 2006). Cash must also be converted to geographically accepted currencies, which
exchange transactions can trigger documentation requirements. For the AQ operative
attempting to avoid detection or arouse suspicion, moving around with large amounts of cash is
simply not an option.

The key to avoiding detection when physically transporting large amounts of capital is
converting cash into what can be called “compressed assets”. A compressed asset is one in
which a large amount of value is stored in a physically small amount of space. The ideal
compressed asset is also easily converted back into cash when necessary and convenient.
Gemstones and gold are perfect matches for this requirement.

The trading of gemstones has been a source of AQ revenue, more importantly, a critical means
of hiding and transporting funds. Gemstones are small, easily smuggled, untraceable and fairly
liquid commodities; the perfect compressed asset. In any city on the planet, one can convert
gemstones into cash and there are countless willing buyers. The industry is largely unregulated
and there is a prolific black market within which one can avoid reporting sales and purchases to
government authorities.

The strategic value of the gemstones was likely learned by UBL and AQ leadership as a result
of contact with the Afghan emerald market. In the 1980s, the mujahideen exploited the emerald
fields of the Hindu Kush to drive the war effort against the Soviet Union. During the 1990s, the
Taliban and Northern Alliance bitterly contested and yielded revenue from the Panjsher Valley,
located north of Kabul. UBL was active within the mujahedeen and closely allied with the
Taliban during these periods.

In April of 2009, 70 Taliban fighters attacked an emerald mine in Shangla, Afghanistan, and took
control of operations. “They announced to take [sic.] control of mining operations and offered
the locals to work with them and share the profits. They bought mining equipment from the
nearby Kotkay Bazaar” (Daily Times, 2009). Insurgent and AQ activities in Afghanistan are still
today thought to be partially funded by the emerald trade, but the value and volume of these
stones pale in comparison to the AQ’s historical gemstone activity in Africa.

AQ’s initial foray into the African gemstone market started in the mid-1990s (Farah, 2004).
Tanzanite, found only in a five square mile region of Tanzania, is estimated to be one thousand
times rarer than diamonds. A controversial November 2001 Wall Street Journal article, entitled
Much Smuggled Gem Called Tanzanite Helps bin Laden Supporters, outlined the smuggling of
the precious stone from mines to the United States, Dubai, and Hong Kong. One early stop was
the Taqwa mosque in the village of Merelani which doubled as a gem bazar (Block & Pearl,
2001). The imam, Sheik Omari, “issued edicts saying that Muslim miners should only sell their
stones only to fellow Muslims,” and, “preached the virtues of suicide bombings” (Block & Pearl,

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2001). AQ’s influence in the tanzanite market was openly known. “Yes, people here [in
Tanzania] are trading for Osama [bin Laden],” said one miner. “Just look around and you will
find serious Muslims who believe in him and work for him” (Farah, 2004).

Evidence in the trial of Wadih El Hage – convicted of the bombings in Nairobi, Kenya and Dar
es Salaam, Tanzania - also established a link between revenues from tanzanite trade and AQ.
El Hage’s dairies include references to buyers from Antwerp to Dubai to San Francisco, with
detailed notes, such as, “will buy rough [stones]. Is willing to come over to Nairobi. Any amount
of raw, $60, $80 up to $100” (Farah, 2004). El Hage also had contact information for diamond
buyers and jewelry stores all over the world.

Beginning in September 1998, following the bombing of the US Embassies in Kenya and
Tanaznia and subsequent moves by the US and its allies to freeze $240 million of AQ and
Taliban assets, AQ began established an ambitious and escalating diamond purchasing
operation in West Africa. While the tanzanite operation was largely for profit, the diamond
operation was about asset conversion from cash to a more mobile instrument. Said one
intelligence analyst, "It was at that point that AQ realized where it was vulnerable in its financial
structure and began to systematically move its assets to commodities" (Farah, 2002).

Abdullah Ahmed Abdullah, who previously shared a room in Nairobi with el Hage and was
involved in the tanzanite trade, spearheaded the operation. A source in Liberia remarked that,
“[the] Arabs were paying more than the going rate for [diamonds], and were buying as many as
they could.” The same source identified Abdullah and two other AQ players - Ahmed Khalfan
Ghailani and Fazul Abdullah Mohammed - as active diamond buyers in the country. He further
noted that he was frequently invited to watch videos of Hezbollah suicide bombings in their safe
house and that the walls were decorated with pictures of UBL. An additional source
corroborated the presence of these same men in Sierra Leone (Farah, 2004).

By the April to August 2001 diamond mining season, Ghailani and Mohammed were such active
buyers that they, “appear to have cornered most of the Sierra Leonean and Liberian diamond
markets during that period” (Farah, 2004) . In addition to direct minehead acquisitions, evidence
suggests that AQ operatives were purchasing $500,000 of diamonds every ten days through
brokers in the Sierra Leone trading centers of Bo and Kenema, paying up to a 30% premium for
stones. One dealer recalled, "At the prices they were paying, it was clear they were not buying
to make a profit and [in what should have been the busiest season of the year] there were no
stones at all to buy. All my regular suppliers were getting better prices elsewhere. We all knew
something wrong was going on with the market" (Farah, 2004).

In a memorandum from Ayman al-Zawahari (AQ’s chief architect) to Abdullah, found on one of
two computers acquired by the Wall Street Journal in Kabul in 2001, al-Zawahari lauded the
diamond operation and wrote that it, “may well be a way out of the bottleneck and transfer our
activities to the stage of multinationals and [bring] joint profit” (Cullison & Higgins, 2001).
Presumably, the “bottleneck” to which Zawahari refers is the inability to freely move funds within
the banking system.

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AQ had been using a corporation named DiamASA to move a portion – up to $70M - of their
raw diamond purchases from West Africa to Antwerp for reconversion to cash or cutting but, by
the fall of 2001, AQ began to take direct delivery of the diamonds and retain them. Normally, an
annual influx of West African diamonds would appear in the Antwerp market during the mining
season; in 2001, no such increase in supply occurred. In one instance, a known AQ diamond
smuggler was tracked to Karachi, Pakistan then lost at the Afghanistan border (Farah, 2004).

AQ trading in gemstones continues in Africa today. As recently as 2010, the United States had,
“suspicions that diamonds are being sold [in Zimbabwe] to Lebanese traders acting for AQ”
(Evans-Pritchard, 2010).

Gold, like gemstones, is untraceable, and easier to transport than cash. If anything, gold is
even more liquid than gemstones and can be traded in even the most remote locations on the
planet. It requires little skill, unlike gemstones (i.e., no cutting), to refine to its maximum value
and can be smelted, melted, combined and reformed into everyday objects with equipment that
is very easily obtainable.

“In the developing world, gold is often the most reliable means of exchange.” (Napoleoni, 2005)
A Pakistani financial expert remarked, “[a] person in the hinterland here can tell you what the
value of their house or farm animal is worth in gold, but has to think about the value in rupees or
dollars. Gold is part of our being” (Farah, 2004).

The total amount of the gold held by AQ globally is unknown, but the organization is known to
have had a considerable number of sources. During Taliban rule in Afghanistan, AQ collected
taxes in gold from Indian and Pakistani trucking companies that traversed the country. The two
groups also collected taxes on Afghan opium production in the form of gold. Furthermore,
officials from the United States and England have stated that “significant” donations were made
from wealthy supporters in gold and transferred from Dubai to Kandahar via Ariana Afghan
Airlines (Farah, 2002).

As the Unites States was invading Afghanistan in 2001, “AQ and the Taliban raided the vaults of
the Afghan national bank, as well as local banks, looting millions of dollars in cash and gold
reserves” (Ehrenfeld, 2005). At the same time, they were feverishly sending cash and gold
across the border to Pakistan, which was eventually distributed to Sudan and back to Dubai. An
AQ manual, later recovered by allied forces in Afghanistan contained detailed instructions for
concealing and smuggling gold on small boats and in specially made vests (Farah, 2004).

In a mid-day incursion in May of 2010, armed AQ gunmen robbed nine stores in Baghdad gold
market, killing 15 in the process and escaped with a “large quantity” of gold. (Ahmed, 2010) In
the next month, AQ was blamed for the armed robbery of gold from 13 stores in two separate
incidents that killed seven (Williams & Duran, 2010).

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AQ’s ability to traffic gold is closely tied to the hawala system, the unregulated financial transfer
system that is pervasive in Asian and Arab culture, and through that system gold becomes
convertible into any currency in a matter of hours (Napoleoni, 2005).

The hawala finance system is extremely appealing to terrorists and other criminals because it is
transnational, operates in real time, leaves no paper trail and is self-regulated (Napoleoni,
2005). It is believed that the failure rate of global hawala transactions is nearly zero, primarily a
result of the fact that other hawaladars in a community will ensure that payment is remitted in
the event of non-performance to maintain confidence in the system. And, maybe more
incentivizing to a hawaladar, failure to perform may mean a death sentence.

The operational procedures of the hawala system are simple. A sender in New York wants to
send money to a recipient in Kabul, he contacts local Hawaladar A and hands over cash for the
transaction. Hawaladar A in New York contacts Hawaladar B in Kabul and instructs him to
release funds to the recipient. The sender contacts the recipient, gives him a code or password,
and the recipient can pick up his funds almost immediately from Hawaladar B. A small fee
(0.5% to 2.0%) is paid for the service and usually a small premium on the then-current
exchange rate between the sent and received currencies, both of which are generally split 50/50
between the hawaladars. This transaction is detailed in Figure 2 below.

                                                     Figure 2
                                                Hawala System

                                                    Payment Code

          Sender                                                                      Recipient

                            Hawaladar                Settlement        Hawaladar
                               A                                          B

                                                Funding Instructions

Periodically, accounts must be settled between hawaladars, but it is normally a netting of funds
sent and received over a large number bundled transactions. This is frequently accomplished
through import/export counterbalancing. If Hawaladar A owes Hawaladar B $25,000 he may

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uses his export company to send $100,000 worth of goods from the United States to
Afghanistan, while under-invoicing for $75,000. Alternatively, Hawaladar B could send $75,000
worth of goods from Afghanistan to Hawaladar B in New York and over-invoice by charging
$100,000. In either instance, the $25,000 has changed hands in the form of a non-cash
commodity. An additional strategy is to false invoice in an import export/transaction. This can
be either (i) practice of shipping one good or commodity while claiming to be another of greater
or less value as is needed to achieve reconciliation, or (ii) issuing an invoice for a shipment that
never occurred.

Other means of settlement include cash couriers, compressed asset transfers and - blended
with the legitimate proceeds of a variety of retail and service businesses - bank transactions
such as wire transfer check or cash deposit (Kochan, 2005). Bank transaction settlements offer
the most opportunity for hawaladar identification but little in the way of transaction monitoring.

The bundling of multiple (in some instances hundreds) transactions for settlement makes the
hawala network extremely resistant to traditional finance tracking because it not only clouds the
originator and recipient of the funds, but makes it nearly impossible to pinpoint single
transactions (Jost & Sandhu). The amount of capital in India’s hawala system alone has been
estimated at $680 billion, equal to the entire economy of Canada (Wood, 2007). By some
estimates, hawala handles more international transactions in the Middle, East, Asia and the
Pacific than the established banking system (Giralldo & Trinkunas, 2007). The vast majority of
these transactions are not terror related, which further thickens the smoke screen for nefarious

 “Historically, gold is the preferred means to provide countervaluation in hawala transfers”
(Cassara, 2006). Many hawaladars hold large gold reserves around the world to accomplish
countervaluation and intranetwork settlement and will gladly accept or make payment in gold; it
is easier for them to access than large amounts of currency for the same reasons that terrorists
avoid cash. “De facto, the hawala system operates on a strict gold standard; currency rates, for
example, are set according to the value of the metal” (Napoleoni, 2005). “If you say you want
100 kilos of gold [roughly $4.5MM worth], I can give it to you wherever you want in 12 hours,”
said Abdul Razzak, one of Dubai’s largest gold dealers (Farah, 2002).

Diamonds and other gemstones are also a favored reconciliation medium for hawaladars. One
Dehli-based hawaladar is known to have transferred $1.3MM to $2.25MM on a daily basis,
using diamonds as the sole means of reconciliation and countervaluation (Chowdhury, 2011).
Though it is unknown what percentage, if any, of these funds were tied to AQ the scope of this
single hawaladar’s dealings in diamonds underscores the ability of AQ to employ diamonds
within hawala.

Hawala is a particularly useful tool in money laundering. However, AQ money laundering
activity differs from that of traditional criminal laundering. The simplest way to explain this
difference is that while a criminal organization tends to seek an ability to place gains from illegal
activities into the legal banking system without detection, AQ strives to remove and keep capital
out of from the traditional banking system – thus reducing the likelihood of tracking - while

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maintaining the ability to internationally deploy the capital into for operational needs without
detection (Kochan, 2005). Capital transfers using the hawala system leave scarce, if any,
physical or electronic record. Compound this with the low cost of executing back-to-back
transfers, the ability to change from currency to currency or from currency into compressed
commodity assets (and vice-versa), the further blurring of multi-transaction settlement and the
incorporation of import/export invoice manipulation. The result is a near-perfect means of

It should be repeated that hawala does have legitimate, lawful uses and is a critical component
of commerce and trade in many undeveloped nations; in some instances it is the only means of
long-distance fund transmission. Many charitable non-government organizations use the
hawala system to send operating funds to remote locations and the majority of transactions are
not believed to be criminal in nature (Maimbo, 2003). Fund remittance through hawala can also
be less expensive and faster than traditional banking systems. Fund availability through
international bank wire can take up to a week and it’s not unheard of for a wire to get “lost” in
transmission, which requires an even longer period of time to resolve.

It is, however, known that AQ actively has used and continues to use the hawala system and it
is likely the chief mechanism for the transfer of its assets throughout the word (Ehrenfeld, 2005).
Times Square bomber Faisal Shahzad allegedly used the "hawala" system to receive funding
for his failed New York operation in 2010 (CBS News Investigates, 2010). Furthermore, the
mass transfer of gold and other assets of Afghanistan in 2001 via Pakistan was primarily
achieved through the use of hawala (Farah, Blood From Stones, 2004).

Curbing al Qaeda Trade in Gemstones and Gold
There is no way to completely prevent AQ from possessing gemstones and gold. But, there are
two ways to diminish AQ’s ability obtain and trade in gold and gemstones in large volumes: (i)
tighter regulation of industry participants and (ii) reducing the volume of overall smuggling that
originates from the world’s top producers.

The regulatory and anti-smuggling strategies have a dual benefit is denying AQ access to the
gemstone and gold markets market. First, the reporting of transaction and trade participants
and suspicious activities is a dissuader for AQ participation. A cross reference of known AQ
operatives and financial agents can rapidly flag AQ-related transactions. Secondly, the
reporting requirements for certain sized transactions and certain suspicious components and
circumstances significantly reduce the “off-books” liquidity of gold and gemstones.

The primary tool employed to reduce the flow of rough diamonds that fund conflict (such as
those that were purchased by AQ in Sierra Leone and Liberia) into the global market is the
Kimberly Process Certification Scheme (KPCS), which was put into practice by the United
Nations in January of 2003. The main requirements of KPCS deal with the packaging and
certification of the diamonds, with a further mandate that KPCS participant nations only trade
with nations that are also KPCS adoptees. Rough diamonds must be in tamper–evident
containers and be accompanied by a uniquely numbered and forgery-resistant certificate, “with

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a particular format which identifies a shipment of rough diamonds as being in compliance with
the requirements of the Certification Scheme” (Kimberly Process, 2002).

The World Diamond Council (WDC), which counts every major diamond manufacturer and
trading company as members, created the following warranty that was endorsed by all KPCS
participating countries and is present on every certificates: “the diamonds herein invoiced have
been purchased from legitimate sources not involved in funding conflict and in compliance with
United Nations resolutions. The seller hereby guarantees that these diamonds are conflict free,
based on personal knowledge and/or written guarantees provided by the supplier of these
diamonds” (Hoffman, 2010). The issuance of a forward warranty without rear-looking chain of
custody warranties is a violation of WDC membership and results in expulsion, effectively an
exile from the industry.

Companies within KPCS member nations are required to keep a detailed log of all transactions
and have them audited by a third party on an annual basis. KPCS member nations must, in
turn, submit a compiled annual report and are required to enforce civil and/or criminal penalties
against resident companies that are in violation of the standards (Kimberly Process).

Member nations can and have been expelled from KPCS for violations, which is not an
insignificant punishment. Since KPCS participants are barred from diamond trade with the non-
KPCS nations, an expulsion cuts off the violator from nearly the entire global market (Hoffman,

Successes of KPCS are, as follows:

        1) Broad Adoption: “As of December 2009, there are 49 participants representing 75
           countries, with the European Community counting as a single participant. The
           participants include all major rough diamond producing, exporting and importing
           countries” (Kimberly Process).

        2) Supply Reduction: It has reduced the volume of rough conflict diamond in the global
           market from 15% to less than 1% (Kimberly Process).

The primary failure points of KPCS are:

        1) Limited Scope: It only deals with rough diamonds. The lack of regulation of cut and
           polished stones offers a significant loophole for the successful smuggler who
           engages a cutter.

        2) Seller Oriented: KPCS does not require any investigation into the purchaser. A
           terrorist may acquire rough diamonds if the rear-looking certificates and warranties
           are in order.

        3) Voluntary Participation: KPCS participation is not mandated by the United Nations,
           and therefore expulsion does not result in United Nations sanctions. Those nations

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             most likely to be violators are those whose leadership would have no ethical qualms
             with fraudulently inserting their diamond exports into the global supply.

        4) Voluntary Internal Enforcement: KPCS relies on member nations to adequately
           monitor companies within their borders and to punish violators.

The most efficient way to reduce AQ access to diamonds is to improve KPCS. The United
States should press the United Nations to require KPCS participation of its membership and
properly fund the body for more aggressive monitoring. Non-compliance with KPCS would then
subject violators to international sanctions. While it’s unrealistic to expand the scope of the
system to include the sale of every cut diamond – considering the size of the secondary and
resale market for diamonds and diamond jewelry – participating nations should require the
cutting industry to verify the source of every stone that is processed. With regard to the lack of
focus on what parties are purchasing the diamonds, much like the banking industry has
minimum “know your client” standards, requires suspicious activity reports and must report cash
transactions over a specific amount, the diamond industry in KPCS nations could be required to
do the same. In the United States, dealers in gemstones and jewels are, under Section 352 of
the USA PATRIOT ACT required to maintain an anti-money laundering program, and to report
cash transactions over $10,000, but there is no requirement for suspicious activity reports, only
a suggestion (Financial Crimes Enforcement Network, US Department of the Treasury).
Suspicious activity reports should be made mandatory and the requirement an addition to KPCS

Though United States dealers in colored stones, including tanzanite and emeralds, are subject
to these Section 352 requirements, there is no consistent, international KPCS-like system
governing non-diamond gemstones. Steps should be taken to create one, or an expansion of
KPCS to include rough colored stones, with similar United Nations international adoption
requirements. Following the inclusion of emeralds in KPCS, buyers should be required to
employ a widely held technology (infrared spectra) that is traditionally used to determine
whether a stone has been artificially treated to uncover the “DNA” of its source (Reich, 2004).
For raw emeralds determined to be from Afghanistan, a requirement to obtain documented
provenance and check against the FBI Terror Screening Database could be instituted.

Tanzanite has become less of a risk as an AQ financial resource. There is only one point of
origin for tanzanite, therefore determining the source of the material is not an issue. The
tanzanite mining industry is now dominated by TanzaniteOne, a company traded on the London
Stock Exchange, and the US State Department stated in 2002 that there was no ongoing link
between tanzanite and terrorism (Roskin, 2002).

Dealers in gold are also required to abide by Section 352 requirement, and have a lower
reporting threshold than gemstone dealers; gold sales exceeding $600 must be reported (Blake,
2010). Pressing for wider adoptions of these regulatory requirements on an international basis
would reduce the number of transactions wherein gold may be purchase by AQ or its agents.

However, the chain of custody for gold is much more difficult to establish and track than that of
gemstones. A gemstone cannot be made larger, whereas as individual pieces of gold can be
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melted down and combined, rendering useless any physical mechanisms such as serial
numbers. These facts, coupled with the limited amount of skill needed to refine and aggregate
gold (as opposed to cutting raw gemstones), effectively eliminates the likelihood of success for
a KPCS-like system for gold. Supply side anti-smuggling activities are the more effective focus.

Smuggling - the movement of goods without customs duties and declaration – in gemstones
and gold is a complicated issue. First, one needs to understand why smuggling activity is an
enabling system for AQ. By circumventing the customs process, it is impossible to determine
the identities of purchasers and sellers and thereafter monitor them. Customs declarations
made in most countries in the world are monitored and, using existing intelligence and
databases, AQ-linked parties can be flagged (see DARRTS reference within the following
section of this document) and apprehended.

Though very little information is available on the cumulative value of the global illicit gold trade,
the following individual nation smuggling statistics highlights the staggering scope: Peru, $5.56
billion; Democratic Republic of Congo (DRC), $1.24 billion; and, South Africa, $547 million.
Smuggling of raw diamonds and colored gemstones are estimated to be $860 million and $400
million, respectively, for a total of $1.26 billion. Notably, these figures are only based on newly
extracted materials, not the secondary resale/trade market (Haken, 2011).

The regulatory concepts and suggestions for modifications already presented in this section
serve to curtail the demand for smuggled goods. The supply side of the smuggling equation –
the flow of goods from producing nations in this case – is a difficult issue to address. The vast
majority of the world’s production in gemstones and gold is from developing nations which, by
definition, do not have the level of resources available to more advanced nations. Smuggling
sustains this problem by robbing the governments of these developing countries of needed
revenues from export duties.

Government corruption and instability are the key enablers of large-scale smuggling and these
problems are more prolific in developing nations. In Peru, smugglers rely on corrupt local
politicians in Peru are allowing illegal mining operations to carry on at an alarming level
(Collyns, 2011).

A corrupt official has little motivation to change the status quo if he or she is financially
benefitting with impunity. In the DRC, “[c]riminals and corrupt officials who are currently
profiting from the illegal mining and trade of gold are actively and deliberately inhibiting
development” (Haken, 2011). A general in the DRC military installed a mine in return for “25%
of the monthly production of the raw gold” (Fessy, 2010). The same general reassigned border
troops, which were supposed to be preventing other smugglers from operating, to monitor the
mine. The absence of a reliable government in the DRC makes enforcement nearly impossible.
“Criminals rely on the state’s inability to control its territory and borders” (Haken, 2011).

The United States must more actively use its geopolitical influence to stabilize nations such as
the DRC. It must insist that rampant corruption not be tolerated in Peru and other nations. This
is broadly stated solution but one that must be implemented nonetheless, with a specific
emphasis on stemming the flow of smuggling and the illegal exploitation of mineral resources.

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As an example of the lack of this specific focus, the United Nations has long been pursuing
sanctions against the DRC, but the most recent (20-page) report on its activities in the nation
devotes only four sentences to the topic of mineral resource exploitation (United Nations
Security Council, 2011).

Denying Access to Hawala
As stated earlier, hawala has legitimate uses and is a critical part of many developing
economies. Therefore, the goal of the United States and its allies should not be to eliminate the
system - which would only drive it further underground - but rather to regulate it to prevent its
use for the transfer of AQ funds. Regulation requires registration, and registration must be

Enforcement of registration requirements, and prosecution for non-compliance, would rely on
identifying those who are operating without registration. The challenges in matching individual
transactions that hawala presents in the bundled reconciliation process also creates a
vulnerability for hawaladars who would prefer to operate anonymously.

Anti-money laundering laws in most banking hub nations have evolved to the point where
unusual banking activity is identified and reported, which drives many hawaladars to employ a
trade-based approach to intra-network reconciliation. The task, then, becomes detecting trade-
based reconciliation transactions.

The United States maintains the most advanced system on the planet for monitoring
international imports and exports: the Data Analysis and Research for Trade Transparency
System (DARTTS). Managed by US Immigration and Customs Enforcement (ICE), DARTTS is
a pool of data that compiled from a diverse series of sources, including United States
import/export information provided by U.S. Customs and Border Protection (CBP) and the U.S.
Department of the Treasury Financial Crimes Enforcement Network, trade data provided by
foreign governments (import/export duties and other tax information, Bank Secrecy Act (BSA)
databases, insurance 0companies and other law enforcement and trade monitoring agencies
(Cassara, 2006).

The system relies heavily on Financial Intelligence Units (FIUs) in foreign countries to
collectively share data. The system has been a success: FIUs have been established in over
100 nations to date (Wolf, 2006). This compilation of data allows not only the United States, but
also the Egmont Group of FIUs across the globe and member nations of the Financial Action
Task Force (FATF), to rapidly sift through data to identify trade anomalies in invoice
reconciliations (Rahilly & Teuful III, 2008). Red flag transactions include, but are not limited to:

       Payments to vendor made in cash by unrelated third parties,
       Payments to vendor made via wire transfers from unrelated third parties,
       Payments to vendor made via checks, bank drafts or postal money orders from
        unrelated third parties,
       False reporting, such as commodity misclassification, commodity over-valuation or
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     Carousel transactions (the repeated importation and exportation of the same high-value
    Commodities being traded do not match the business involved,
    Unusual shipping routes or transshipment points,
    Packaging inconsistent with commodity or shipping method, and
    Double-invoicing.
(US Immigration and Customs Enforcement)

The more data that is compiled into the DARTTS system, the more effective it will become. The
United States should continue to expand the number of participant FIUs and consider grants to
and deploying personnel in developing nations to expand this data pool. Nations that choose
not to cooperate with the information and reporting sharing policies of the United States should
be denied access to American banking systems, financial markets and international aid.

Regulation of the hawala system presents a unique set of challenges. Although the instinctive
reaction may be to immediately mandate full regulation and require complete reporting of all
transactions, such a rapid change would likely not be realistic from an adoption perspective.
For one, the hawaladars would flee from such a requirement, thus pushing the system further
into the shadows. Additionally, hawala usage is high in certain nations because their banking
systems are inefficient and/or do not have the coverage or reach to effectively serve the entire
populous. To believe that these nations could effectively manage the bank-intensity regulation
of countless hawaladars of varying transaction volumes is optimistic, at best.

A more practical strategy is a gradual introduction of regulations with three requirements being
instituted immediately: (i) registration of hawaladars and a minimum licensure standard; (ii)
minimum customer identification and recordkeeping requirements; and, (iii) adherence to a
mechanism for facilitating investigation when needed (Maimbo, 2003).

Registration and licensure should be as simple as identifying oneself as a hawaladar, proving
identity and address, submitting to a criminal background check, maintaining a physical address
for the safekeeping of records, and guidelines for making suspicious activity reports, as well as
a means for doing so.

The minimum standards for customer identification should be proof of identity and proof of
address. This section has been intentionally deleted.This section has been intentionally
deleted. This section has been intentionally deleted.

Recordkeeping should be simple – date, amount sent, from whom to whom and the identity of
the correspondent hawaladar. This would, at least, identify the participants and the amount of
the transfer.

The mechanism for investigation should be pre-established. Authorities should be able to
review the records of a hawaladar if they believe that an illegal act has occurred or is imminent.

Simply issuing guidelines for making suspicious activity reports and informing hawaladars how
they should inform authorities of incidents may increase the practice of self-policing within
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The goal of the foregoing regulatory suggestions is to drive out the hawaladars who are
engaging in or facilitating criminal and terrorist activity. By removing the unscrupulous from the
system, AQ’s ability to use hawala would be diminished. As with information sharing, nations
that do not institute these policies should be denied access to American banking systems,
financial markets and international aid.

Like any international organization, AQ needs financial resources to operate and achieve its
objectives. The efforts of the United States and its allies in the war on terror have been largely
effective in denying AQ access to the traditional avenues of capital storage and transmission.
As a result, AQ has been forced to engage in non-traditional means to retain its capital base
finance their objectives, including conversion of capital to compressed assets and utilization of
the hawala remittance system. The United States and its allies must act to deny these means
by using their collective geopolitical and financial strength to affect international policies that will:
(i) diminish the global industries for - and smuggling in - illicit gemstones and gold; and, (ii)
reduce the number of criminal participants in the hawala system.

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Cassara, J. A. (2006). Hide & Seek: Intelligence, Law Enforcement and the Stalled War on
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Description: The United States should continue to confront AQ finance as it has in the past, but also must expand and adapt its strategies in response to AQ’s agility in modifying its capital movement tactics. This document addresses several of these tactics (gemstones, gold and hawala) how they can be countered, and offers suggestions to better track and interdict derivative AQ assets on the move.