A Tale of Two Studies: The Real Story of Terrorism Finance
I was pleased when I saw that the University of Pennsylvania Law Review had published a new article on terrorism financing, especially when I saw that my friend and frequent collaborator Jason Sharman was an author. But my pleasure turned to puzzlement, then to dismay, as I delved into it.
The Article, entitled Funding Terror, consists of three parts. The first is primarily a discussion of what we already know about terrorism financing, focusing on the use of shell companies (not easy to define, but, more or less, companies that have no independent operations, significant assets, ongoing business activities, or employees) by terrorists, and on steps recently taken by countries to reduce the threat of terrorism. This first part repeatedly asserts that terrorists use shell companies to facilitate their nefarious activities and discusses how the United States and other jurisdictions have responded by trying to prevent terrorists from doing so.
The second part of the Article presents an experimental study regarding the circumstances under which lawyers and certain other persons known as corporation service providers will assist different types of clients in setting up companies in different jurisdictions. The study finds that forming an anonymous shell company is not difficult, despite increased regulations following September 11—results that are “disconcerting and demonstrate that we are far from a world that is safe from terror.” While the quality of the study is excellent, its relevance to terrorism finance hinges on the accuracy of the conclusions in the first part of the Article—that terrorists use shell companies. Based on the results discussed in the second part, the third part draws conclusions about whether the jurisdictions identified in the second part are more likely to facilitate terrorism and whether domestic or international law governing the setting up of shell companies is more successful as a deterrent to the formation of those companies by terrorists. Again, the relevance of this third part is tied to the conclusions of the first part.
If it were true that terrorists regularly used shell companies, it might make sense to dedicate additional resources to stopping them, including requiring corporation service providers to do a better job of detecting when their clients are really bad guys. Because, as the Article correctly notes, shell companies can be used for legitimate as well as illegitimate purposes, government must take care to fight the bad guys without overly impeding the good; as a result, the rules must be more nuanced and therefore difficult to enforce than would be the case if shell companies were simply banned altogether. However, given that the resources to prevent bad guys from doing bad things are necessarily finite, shifting resources to initiatives intended to stop terrorists from setting up or using shell companies necessarily means shifting them from somewhere else. But if that somewhere else is actually stopping bad guys, and if the assertion that terrorists use shell companies is false, the result could actually harm antiterrorism efforts.
I don't know if existing antiterrorist financing efforts are effective or efficient, nor do I know if efforts to try to stop terrorists from using shell corporations would actually pay off—though I have my doubts. But more importantly, I'm fairly sure that no one knows—except maybe the terrorists themselves. Pretending we do could result in policy changes built largely on myth, which is usually not a good idea. Unfortunately, it is a myth to claim that we know terrorists are using shell companies to finance terrorism. That this myth masquerading as truth made it into one of the nation's most respected law reviews is, in my view, unfortunate.
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Dorothy E. Roberts