links to the homepage
last updated 31/1/2005
 
home about oD site tour press FAQs group subscriptions register for free sign in  
home
conflicts
Democracy & Terror
Hostage-taking: the new face of war?
After Madrid: war, prevention, dialogue?
Iraq - the war & after
Iraq: war or not?
Israel & Palestine – old roads, new maps
Iraqi Voices
The Politics of Verticality
Witnessing conflict
The Middle East
India/Pakistan
American power & the world
columns
Iraq: The Human Cost
Arthur C. Helton and Gil Loescher
Global Security
Paul Rogers
Other content
feature articles
web links
stories
Theme editors
Rosemary Bechler
Search the theme

 Democracy & Terror
  Overview Articles Discussion Links   
------------------------------------------
The new economy of terror
Loretta Napoleoni
26 - 1 - 2005
Terrorism is business as well as politics. Loretta Napoleoni explains how its funders and sponsors support its operations by covert, sophisticated use of changes in the global financial system.
------------------------------------------

Three and a half years since 9/11, the world is still beholden to the belief that it is politics or ideology that fuels armed struggles worldwide. But an analysis of five decades of modern terrorism reveals two unexpected and disconcerting truths: that the engine of the armed struggle is money, and that the deregulation of finance has allowed terror networks deeply to penetrate legitimate institutions of the international financial system.

During the period of decolonisation and cold war after 1945, armed organisations were economically dependent on rich sponsors – former colonial powers (as with the guerrillas trained and bankrolled by France in Indochina) or superpowers (the state-sponsored terror groups funded by the United States and the Soviet Union to fight wars by proxy on the periphery of their own spheres of influence). The high cost of this type of war, and their domestic unpopularity, forced these powers to resort to a mixture of legal and illegal revenues to channel money to their favoured clients.

An International Summit on Democracy, Terrorism and SecurityM will be held on 8-11 March 2005, sponsored by the Club de Madrid. and the Varsavsky Foundation. Ahead of the summit, a new openDemocracy debate – introduced by Chloe Davies, and involving Karin von Hippel, Mary Kaldor, Roger Scruton, Fares Braizat, Charles Peña, Fred Halliday, John Hulsman, and David Elstein – explores how best democratic states and citizens can respond to terrorism.

To find out more about the Madrid summit visit safe-democracy.org, register to receive information here – and add your own views to a developing dialogue!

A classic example of this was the Reagan administration’s sponsorship of Contra armed groups fighting against Nicaragua’s Sandinista government in the 1980s. Amid widespread political opposition to this United States policy, the administration secured Congressional approval for a financial aid package of $24 million (which was used to arm 2,000 Contras). This sum was increased each year until the eruption of the Iran-Contra scandal in 1986, but it was still insufficient to meet the high costs of bankrolling the group.

To bridge the gap, several covert operations were put in place in parallel with the official pro-Contra campaign. A web of thousands of people and hundreds of companies and foundations contributed to the project, defrauding American taxpayers of billions of dollars. One such operation was an illegal scheme, in which US weapons acquired by the CIA were sold to the Islamic Republic of Iran, using Israeli and Saudi businessmen as brokers, who charged handsome fees. Iranian payments were channelled through numbered Swiss accounts controlled by the Contra leadership. American taxpayers ended up paying for the cost of both legal and illegal funding in the anti-Sandinista campaign; the heaviest economic burden of state-sponsored terrorism falls on the domestic economy of the sponsor.

Terrorism is an expensive business. In the mid-1970s, the Italian Marxist terror group Brigate Rosse (Red Brigades), had a yearly turnover of $8-$10 million, equivalent to that of a medium-size north Italian commercial enterprise. Unlike the cash-generous United States, the Soviet Union chose to supply its favoured groups with free training, arms and ammunition. Western European groups like the Red Brigades and the Baader-Meinhof gang had to raise their own cash. This required managerial finesse more than military expertise.

Terror and the “shell-state”

Since the 1970s, the desire of armed organisations to gain financial independence from their sponsors in the face of the rising costs of terrorist activity, led them to seek greater self-sufficiency. For example, Yasser Arafat masterminded the transition of the Palestine Liberation Organisation from a state-sponsored to an economically independent armed group by creating the first model of the “privatisation of terrorism”.

During the Lebanese civil war, Arafat assembled a de facto Palestinian state held together by a well-developed socio-economic infrastructure, even in the absence of self-determination. Over the last thirty years, similar “shell-states” have blossomed in zones of war and political instability. Colombia, Peru, Chechnya, Afghanistan, Nepal and now Iraq have become breeding-grounds for these entities. After terror groups establish military control over an area, they destroy the existing socio-economic infrastructure (or what is left of it) and seek to replace it with the armed groups’ own socio-economic infrastructure, one designed exclusively to feed the armed struggle. The 2003 attacks against the United Nations and the Red Cross in Iraq, and the more recent kidnappings of aid workers, form part of this strategy.

The key to the survival of the shell-state rests upon the management of its finances, and on its interdependency with traditional economies. The Palestinian shell-state was run as if legitimate; for example, a 5% income tax was levied on Palestinians working abroad, and Arab states where Palestinian workers resided were held responsible for collecting the tax. Both legally- and illegally-generated money was invested in legitimate activities through the international financial markets.

In 1976, following the legendary bank robbery of the British Bank of the Middle East , Arafat chartered a flight to Switzerland to invest the PLO’s share of the loot; the Christian phalange and the Corsican mafia, the other partners in the robbery, used their shares to buy arms. CIA estimates are that the PLO’s total wealth in the 1990s was $8-$14 billion. This suggests that the PLO in this period had a higher annual gross domestic product (GDP) than Arab countries like Yemen ($6.5 billion), Bahrain ($6 billion) and even Jordan ($10.6 billion).

As Palestinian wealth grew, so did its interdependence with the economy of its neighbour and enemy, Israel. In 1987, the Israeli finance minister Adi Amorai released a PLO courier who had been stopped at the Allenby Bridge, the transit point between Jordan and Israel. The man was carrying a suitcase with $1 million in cash. Amorai knew that the money would be exchanged in shekels and spent inside Israel, money that was badly needed by the Israeli economy.

The globalisation of terrorism

In the 1990s, the further deregulation of international economic and financial markets gave birth to the globalisation of terrorism. As barriers came down, armed groups linked up economically and started to operate more freely across national borders; the linkages between terrorist-controlled money and traditional economies became closer.

The business empire of Osama bin Laden, whose profits bankrolled terror attacks against western interests across the Muslim world before 9/11, is a striking example of this phenomenon. His portfolio was truly transnational and highly diversified.

While residing in Sudan, bin Laden acquired 70% of Gum Arabic Ltd, a company holding a monopoly of gum arabic (80% of the world supply of this product is used to fix the print in newspapers, to prevent the solution in soft drinks from separating, and to create a protective shell around pills and sweets). By far the largest importer of gum arabic is the US, which enjoys a special price agreement with the supplier. In 1998, the Clinton administration’s decision to impose economic sanctions on Sudan was opposed by lobbies representing US importers of the product. Eventually they convinced the administration to exclude it from the list of sanctioned products. Their argument was very simple: the sanctions would hurt American importers. Why? Because the Sudanese were going to sell the product to the French, the second largest importer, who in turn would offer it to the Americans at a premium.

Terror leaders themselves are well aware of this interpenetration between the terror economy and the official economy. In the 1990s, Osama bin Laden issued a fatwa urging his followers to refrain from attacking Saudi Arabia. The reason was that revenues from legal oil industry businesses, run by Saudis who backed al-Qaida, were needed to consolidate the Islamist revolution. These revenues found their way into the new economy of terror via legal donations or dividends. This fatwa was lifted in spring 2003 when al-Qaida waged its first spectacular attack inside Saudi Arabia.

To read more on the background of modern terrorism, don’t miss Fred Halliday’s on openDemocracy, “Terrorism in historical perspective” (April 2004)

If you find our material insightful and valuable, please consider subscribing to openDemocracy for just £25 / $40 / €40. You’ll gain access to easy-to-read PDFs of all our material.

Western corporations are also often aware that they are doing business with groups that are closely linked with the illegal/terror economy. One way that Islamist armed groups have funded themselves is via smuggling of electronic products in Asia. Daniel Pearl, the Wall Street Journal reporter kidnapped and killed by Jaish-I-Mohammed (Army of Mohammed) in Pakistan reported that the Sony corporation used a contraband network in the continent as a part of its regional strategy.

The dependence of consumers on terror money is evident in Latin America’s “triborder” region connecting Argentina, Brazil, and Paraguay. Here, Arabs linked to the Lebanon-based groups Hamas and Hizbollah run a buoyant money-laundering business, using drug funds to purchase and smuggle duty-free products from Central America.

Terror greenbacks

There is also a close connection between the illegal/terror economy and the United States money supply. Arms, drugs, and people-smuggling are all cleared in US currency. Since the primary means of exchange in the US economy is the dollar, in particular $100 bills, the annual infusion of new US dollars is a rough indication of the rate of growth of this economy.

Research from the St Louis-based Federal Reserve reveals that the stock of new dollars issued in the US and permanently transferred abroad has been steadily rising since the 1960s. In 2000, as much as two-thirds of the US M1 money supply (money in circulation) has been removed from the US monetary system in this way. The amount involved, which does not include stocks of dollars held by central banks in the form of reserve currency, is equivalent to $500 billion. If this assessment is accurate, then the rate of monetary growth of the illegal/terror economy is higher than that of the US economy. Indeed, the stock of dollars held abroad is a considerable source of revenue for the US treasury through seignorage.

The mutual dependence between legal and illegal economies is so deeply rooted that unilateral measures to sever them may actually backfire. The Patriot Act, for example, imposes limits on the operation of non-US banks, reinforcing existing tax legislation which discriminates against foreign investors. The resulting perception that America has become unfriendly to foreign investors has made the euro appear to many a more secure reserve currency to “park” capital than the dollar.

This article is adapted from Loretta Napoleoni’s essay) “Money and terrorism”, published by La Fundación para las Relaciones Internacionales y el Diálogo Exterior (FRIDE) in January 2005

For more information on Loretta Napoleoni’s research into the financing of modern terrorism, click here.

The Patriot Act monitors money transfers denominated in dollars across the world in the effort to curb money-laundering activities, capital flight and terror transactions. This may have reduced the flow of illegal and terror money into the United States. But the absence of equivalent legislation in Europe means that illegal capital flows have been diverted there.

Recent currency fluctuations involving the dollar and the euro may therefore be seen in the light of the shift of businesses in Asia and Africa, illegal as well as legal, towards denominating their transactions in euros – avoiding the restrictions imposed by the Patriot Act. Any attempt to curb this black economy requires a concerted multilateral strategy, which will in turn necessitate United States cooperation rather than confrontation with dollar-holders around the world.


------------------------------------------
------------------------------------------

Got something to say? Got something to say about this article?
    Join the discussion

------------------------------------------
 
------------------------------------------

Copyright © Loretta Napoleoni, . Published by openDemocracy Ltd. You may download and print extracts from this article for your own personal and non-commercial use only. If you are a library, university, teaching institution, business or media organisation, you must acquire an Academic License or Organisational License from openDemocracy, or seek permission directly from the author, before making copies, circulating or reproducing this article for teaching or commercial purposes.

------------------------------------------
home about oD press FAQs privacy policy plaintext site contact us