In a transnationalist world, terrorist organizations have become highly sophisticated and effective, ultimately requiring significant funding. With increasing political tensions, it is essential that it is understood how terrorist entities are being funded, especially through U.S. institutions given our War on Terror. As the power of multinational corporations (MNC) increases ultimately superseding that of individual state boundaries, we must look to MNC for halting the flow of terrorist dollars (Hollis, Martin and Steve Smith 1991, 28). If there were no financial resources available to terrorist organizations, their sphere of influence would be significantly lessened. Therefore, to what extent do U.S. investment firms financially contribute to State Sponsors of Terrorism? I propose that U.S. investment firms are actively financially contributing known State Sponsors of Terrorism (SST), resulting in a positive financial impact to terrorist organizations.
This literature review aims to explore whether there has been previous evidence and research that terrorist organizations are being funded by SST, and then if U.S. investment firms are actively contributing to SST. By way of definition, the official State Sponsor of Terrorism List (SSTL) includes three countries (soon to be four with the newly proposed North Korea): Iran, Sudan and Syria (U.S. Department of State). What has become clear in this review is that this research topic is highly complex, both from a legislative, legal, and portfolio management standpoint. As such, research experts tend to focus on his or her topic of expertise, with very few overarching studies. While I will present a summary below, this is a topic that needs to be more fully explored by the research community.
Overall Funding of Terrorist Organizations
Freeman in his article titled “The Sources of Terrorist Financing” suggests that in order to be successful, terrorist organizations must look at six qualities when looking for financing: quantity, legitimacy, security, reliability, control, and simplicity (Freeman 2011, 463). Research done by Graham Myres supports this, in that capital structures of terrorist entities are funded by diverse streams of revenue (Myres 2012, 696). This is further agreed upon by Raphaeli, who goes on to specifically state that terrorist organizations are supported by Islamic banks, illegal businesses, legal businesses, and charitable organizations (Raphaeli 2003). This ties back in with Freeman’s research as well, who specifically defines four types of financing including state sponsorship, illegal activities, legal activities, and popular support (Freeman 2011). While slightly different in terminology, Raphaeli’s Islamic banks would equate to Freeman’s state sponsorship, legal and illegal business would be the same, and charitable organizations would equate to popular support.
However, the extent to which State Sponsorship plays a role depends on the individual terrorist organization. While State Sponsorship is one of the main sources of funding as it “provides high returns for almost no effort,” it is terrorist group dependent (Freeman 2011, 465). Hizballah specifically, while having a diverse stream of revenue, has been the “recipient of large amounts of state investment from Iran [as well as] material aid from Syria” (Myres 2012, 696).
In comparison, Stergiou, who focuses more explicitly on the Islamic State of Iraq and Syria, suggests five groups of revenue that support ISIS, including illegal activity from territory occupation, kidnapping for ransom, charitable donations, Foreign Terrorist Fighters (those who leave their home country and join ISIS), and fundraising through modern communication networks via avenues such as bitcoin (Stergiou 2016). It makes sense that the financing of ISIS is slightly different than the financing that Raphaeli and Freeman suggest for terrorist groups as a whole, as ISIS is more of a populist movement than the more traditional hierarchical terrorist entities such as Hizballah. However with that said, ultimately the largest source of revenue to ISIS is from oil fields, with foreign government customers including Turkey, Iraqi Kurdistan, Jordan, Iran, and Syria (Stergiou 2016, 194). As both Iran and Syria are on the SSTL, State Sponsorship clearly still plays a role in ISIS as well.
U.S Investment and State Sponsors of Terrorism
With researchers agreeing that State Sponsors of Terrorism have a financial impact to terrorist organizations, albeit to various extent, the next logical step is looking at the research that has been conducted that establishes a link between U.S. investment firms and State Sponsors of Terrorism. Unfortunately, this becomes very technically complex. In Westbrook’s legal review, she argues that because of the complexity of sanctions and lack of transparency, “investors cannot find out whether their own money goes to countries that been designated as a SST” (Westbrook 2010, 1152). In a world of transnationalism with blurred economic nation-state lines, she highlights the point that while U.S. companies can’t directly do business in countries subject to sanctions, such as being on the SSTL would require, non-U.S. subsidiaries often can. In addition, non-U.S companies that sell securities in the U.S. may not necessarily be under the same legal sanctions that is required of the SSTL (Westbrook 2010, 1153). In a world of increasing connectivity, this almost seems archaic. To further complicate matters, although Iran remains on the SSTL, in January of 2016 after the nuclear deal, Iran regained access to the international banking system and became the only designated SST to join the World Trade Organization, making it possible for the U.S. based firms to invest in limited instances (Terris 2017). This contrasts in places such as Syria, where in acknowledgement of the U.S’s potential financial impact regarding ISIS specifically, since 2004, there have been sanctions and special measures on financial institutions in Syria, as well as against the government of Syria (Humud, Pirog, & Rosen 2015, 20).
Both Westbrook, as well as Hemphill and Cullari, propose that the solution is increased transparency provided by underlying companies on their operational and investment activities. However, enforcing a standard entails international cooperation and congruency in law to achieve, which is highly politically charged (Hemphill and Cullari 2010, 36). Furthermore, U.S. investment firms invest in far more than merely U.S. companies, which are by nature subject to the most stringent of reporting laws given that the SSTL is a U.S creation with U.S. sanctions. Yet, at the time of Hemphill and Cullari’s paper in 2010, only 21 US states had adopted legislation for their public pension investments to prohibit investments in companies (including international companies) that are complicit in doing business with countries on the SSTL (Hemphill and Cullari 2010, 30). In addition, these state laws say nothing about private investments, which are a far more significant portion of the market. While a blanket ban to stop financial institutions investing in businesses that conduct operations in SST as a whole seems like a logical solution, there are numerous complications for this to occur, legality aside, as there is no one single database that includes all of the necessary information to make decisions, especially those with international operations.
Karolyi expands on the suggestion for the need for increased transparency with his study on investment performance results for portfolios which invest in companies that have been identified as having interest in countries on the SSTL. While he states that “there are only 15 to 20 U.S stocks so identified in a given year, they are large in market capitalization” (Karolyi 2008, 109). In addition, while it’s been found that announcement of a firm withdrawal from a SSTL country results in a statistically significant increase in firm value, over the long term, investments in the SST have potentially resulted in abnormal returns (Breuer, Felde, Steinger 2015). This is not promising for the industry as a whole.
Where Next?
In conclusion, while it is generally agreed upon, as highlighted by Freeman, Stergiou, Raphaeli, and Myres that terrorist entities need a diverse source of funding and that State Sponsorship is a significant and relatively accessible provider, little research has been done beyond this. According to Hemphill and Cullari, “from an academic perspective, there has been little or no concerted research undertaken by international corporate governance scholars” on the topic of terrorism investments (Hemphill and Cullari 2010, 27). Despite the fact that this study was a few years ago, based on the literature as a whole, it is clear that there is still room for additional findings. With the rise of transnationalism and the increasing connectivity between groups that are no longer defined by nation states, it is all the more important to look to the multinational firms, such as investment firms, to help stop the financial flow of assets into terrorism.