In the effort against terrorism, President Bush froze the assets of the Holy Land Foundation this week, accusing the U.S. Islamic charity of funding the Palestinian extremist group, Hamas. Analysts say the link between charities and terrorist groups is common.

International money laundering expert Jonathan Winer says it has long been the strategy of extremists to channel money raised for humanitarian purposes into terrorist activities.

He says the Nazis built their organization in the 1930's on international money donated to feed the hungry. He points to Chechnya and Kosovo as more recent examples. "Affluent Muslims all over the world were giving money for those causes," he said. "A lot of that money went to charitable reconstruction, but a lot of that money also went for military resistance, and there were terrorists who were recruited out of Chechnya and Kosovo and a lot of that was funded by charitable donations. That is a terrible problem that governments all over the world have to confront."

Economist Randall Dodd, another money laundering expert, says in the Middle East, where there is no tradition of transparency, it is especially difficult to trace where charitable funds go.

Further compounding the problem, he says, is the fact that terrorists use charitable acts to endear themselves to the local population. "If you went over to Israel/Palestine right now, you would see that the reason Hamas is so powerful is that they are a charitable organization that runs schools and hospitals," he said. "It is sort of the [equivalent of the U.S.] 'faith based initiative' over there. Part of them, though, engage in violent activity."

Mr. Winer points to Northern Ireland as another example. He says the British government complained for years that money raised by Irish Catholics in the United States was supporting acts of terrorism by the Irish Republican Army, or IRA. "We made such terrorist fundraising in the United States illegal, and the fundraising for the IRA has been substantially tanked down as a result," said jonathan Winer. "Anyone who is giving funds to an organization it has reason to believe is funding terrorism is potentially at risk for violating U.S. terrorist finance laws. That was true before September 11 and that is true today."

At a time when so much attention is being given to illicit acts, Mr. Winer says, it is important to stress that most charities use all their donations to fund humanitarian activities. Those who support terrorism, he says, are in the minority.

ICE Benefits From Enron Concerns, Reports Surge in Trading Volumes

November 14, 2001

Jeff Gosmano, Andrew Ware.

The Oil Daily

The IntercontinentalExchange (ICE), an electronic trading platform set up by big energy companies, has witnessed a surge in activity as rival exchanges face problems.

Last week, as rumors swirled about the future of energy services giant Enron, many energy traders abandoned EnronOnline for what they said was a more stable business at ICE.

"There has been a clear shift of energy and metal trading activity during October into ICE markets," ICE Chief Executive Jeffrey Sprecher said in a statement Tuesday. "We believe that this has resulted, in part, from the uncertainty that has been exhibited in several key energy trading venues over the past several months."

As well as the turmoil at Enron, ICE has likely benefited from the temporary closure and subsequent disruptions at the New York Mercantile Exchange (Nymex) following the Sep. 11 attacks.

The surge continued into November. Last week, trading volumes in crude oil and products on ICE averaged 11 million barrels per day, a 45% increase over the October daily average.

North American gas volumes last week hit 950 billion cubic feet, up 13% over the previous month's weekly average. In North American power, daily trading volumes surged to nearly 11 million megawatt hours, a 34% increase over the October average.

ICE was founded last year by oil majors BP, Royal Dutch/Shell, and Total Fina Elf, four international banks, and six top North American gas and power trading firms. The electronic exchange is currently installed on about 7,000 desktops at more than 400 trading firms.

Volumes on EnronOnline were down late last week, confirmed company spokesman Eric Thode. "We saw some minor decreases Thursday and Friday. The uncertainty related to the merger had some impact on volumes," he said. Some reports had volumes on

EnronOnline down by about 20% late last week.

Now that Enron's combination with rival Dynegy has been announced, Thode said, the value of trades completed on EnronOnline has returned to a more normal average of $2.6 billion per day.

The "Enron effect" has not been confined to ICE, however.

Since word emerged of Enron's credit problems, open interest has dried up in Henry Hub futures contracts on Nymex.

On Oct. 25, when Enron said it was drawing down $1 billion on available credit lines and seeking more cash to avoid a liquidity crunch, open interest in Nymex Henry Hub contracts peaked that day, then fell 12% over the next four trading days.

According to the Commodity Futures Trading Commission (CFTC), commercial long and short positions dropped by 65,429 and 56,195 contracts, respectively, over the Oct. 30 trading week. Open interest in the full Nymex Henry Hub strip dropped by 64,095, to 457,990 contracts.

The bleeding continued last week. The CFTC said Friday that open interest fell by a further 10,662 contracts to 447,328 through Nov. 6.

One explanation for this contraction in open interest was that Enron was unwinding positions to boost cash on hand. The one-to-many brokering structure of the company's EnronOnline platform makes liquidity particularly critical, said analysts.

"It's an effect that they are a dealer that creates all the counterparty credit exposure," said Randall Dodd, director of the Derivatives Study Center at the Washington, D.C.-based Economic Strategy Institute. "If they're the dealer then they are the liquidity."

If Enron were net short on Nymex and began unwinding contracts, the effect would be to spark a price rally as those shorts were covered. A rally is precisely what transpired. To the surprise of many market watchers, the front-month November Henry Hub futures contract shot up nearly 20% over the span of a week, from $2.68/million Btu on Oct. 23 to $3.20 on Oct. 29, when it went off the board.

Jitters Over Squeeze at Enron Rippling Through Gas Trading

November 12, 2001

Andrew Ware, Michael Sultan

Natural Gas Week

It's hard to imagine that when a giant player like Enron gets sick, a few others in the industry wouldn't also catch a cold. While many energy merchants have assured publicly that Enron's travails are not affecting their trading operations, the evidence suggests business is not usual in the energy patch.

Since word leaked of Enron's credit problems, open interest has dried up in Henry Hub futures contracts on the New York Mercantile Exchange (Nymex). A case can be made that this pullout sparked the technical surge in late-October natural gas prices.

Furthermore, some counterparties are rumored to want to liquidate open positions with Enron, but are being outright refused, or facing delays.

Whether gas prices ultimately rise or fall from this behind-the-scenes shuffling is unknown, but derivatives analysts agree that the "Enron effect" will result in more volatile commodity trading, with the danger particularly acute in the case of a commodity downswing.

It didn't take natural gas markets long to react to Enron's problems. Word leaked on Oct. 25 that Enron was drawing down $1 billion on available credit lines and seeking more cash to avoid a liquidity crunch. Open interest in the Nymex Henry Hub peaked that day, then fell off a cliff, down 12% over the next four trading days (see graph).

The bleeding continued last week. CFTC Friday said open interest fell a further 10,662 to 447,328 contracts through Nov. 6.

There are two explanations for this contraction in open interest. The most obvious is that Enron itself is unwinding positions to boost cash on hand. The one-to-many brokering structure of Enron's EnronOnline platform makes liquidity particularly critical.

If Enron was net short on Nymex and began unwinding contracts, the effect would be to spark a price rally as these shorts were covered. And a price rally is precisely what transpired.

To the surprise of many market watchers, the front-month November contract shot up nearly 20% over the span of a week, from $2.68/MMBtu on Oct. 23 to $3.20 on Oct. 29, when it went off the board. Most November bid-week deals were indexed to this higher Nymex price. Storage levels were approaching record highs, and forecasts were uniformly calling for widespread warm weather through the first half of November.

Energy economist Philip Verleger was among the many analysts expecting gas prices to drop. "I've been following these things for a long time, and the oil statistics make a lot of sense and the gas statistics never seem to tell me a thing," he told Natural Gas Week. "I suspect that's because of Enron."

Whether Enron was net long or net short is not known. Verleger believes they were net short. "Presumably they've written a lot of puts to producers," he said, who wanted to hedge against lower gas prices. Enron would have to open corresponding short positions to balance these contracts.

The other explanation for the open interest drop is that jittery players are simply pulling out of the game. Apache is among the few companies that has admitted to this, unwinding options that it used to hedge past property acquisitions. It realized a net gain of $70 million from the transactions, Apache spokesman Bill Mintz said.

That a producer would be nervous holding open contracts with beleaguered Enron is understandable. Except none of the positions Apache liquidated were with Enron.

"We were worried about some credit risk and counterparty risk due to rippling effects from Enron," Mintz said. Apache had only one transaction outstanding with Enron. "We're still working on that one," he said.

Apache is not the only interest thinking along these lines. "You're hearing in the business guys trying to roll out of small positions directly with Enron and having a hard time making it happen. Or Enron is saying 'Well, we're not going to do this,'" said David Pursell of Houston-based Simmons & Co. "That is making a lot of people nervous."

"The concern in the market is that all roads lead to Enron," he added. "The threat of counterparty risk says I have a hedge in place, but ultimately if Enron is involved in that trade, maybe I won't get paid."

Risk of a Snowball Effect

No one knows how the "Enron effect" will play out in gas prices. But all agree that, by definition, less open interest in a commodity market means more price volatility.

Pursell said this risk will be particularly strong in ancillary markets. A trade point such as the Henry Hub has plenty of substitutes for Enron, but an emerging market, such as the Cheyenne Hub in the Rockies, will see more volatility.

Economist Verleger said there is the possibility that if gas prices start to drop this winter, momentum could snowball. Many producers locked in gas prices with Enron and other marketers when valuations were high. If prices drop beneath a certain floor, marketers will have to sell more contracts to cover the hedge. "It could start a virulent dynamic cycle down in prices," he said.

"I presume Enron intends to draw down its credit lines so it can open short futures positions if prices fall," Verleger wrote in a research note. "I also presume Enron will do everything in its power to keep prices up for the next six months to avoid having to make such sales."

Dodd of the Derivatives Study Center is calling for more safeguards against "market externalities."

He pointed to Enron's troubles with the Dabhol power plant. "Why should the failure of a water treatment plant or a power plant in India cause US derivatives markets to become less liquid?" Dodd asked.

Trading operations should be separately capitalized from other operations, he believes, "so that a failure of your other businesses doesn't drag down your trading operations and harm market liquidity."

He noted a parallel situation among banks, where banking functions are sealed off from other business because of the vital market role they play. "They have required that banks separately capitalize their securities operations and their banking operations, to avoid just this type of problem," he said.

Dodd is particularly peeved that only Enron is privy to volume and open interest information on its trading platform. "They should report on who has the large positions in the market. They should conduct themselves like an exchange," he said. "If this were the Nymex, none of these problems would be happening."

Thwarting terrorism’s money trail: Global financial enforcers fighting pitched battle against secrecy, fraud and culture

October 10, 2001

By Brock N. Meeks

MSNBC

WASHINGTON, Oct. 10 — The global battle to root out and cut off terrorism’s core financial network is a kind of pitched battle pitting enforcers against a long history of institutional banking secrecy, garden variety fraud and a virtually paperless underground banking system based on trust and religion that has endured for centuries.

“CURRENCY can be as lethal as a bullet,” Treasury Secretary Paul O’Neill says in the blunt, no nonsense language fast becoming his Washington trademark. In order to “prevent future calamities” and human tragedy harvested on American soil, the U.S. must “hunt the financial benefactors and the willfully blind financial intermediaries that underwrite murder and mayhem,” O’Neill told a congressional committee last week.

President Bush has signed an executive order to ferret out and “prosecute the campaign” against the global financial terrorist networks, O’Neill said.

But experts say that campaign, much like the military action against terrorism, is a tedious and sometimes internecine endeavor of inter-agency turf battles and uncooperative foreign banking systems that have for decades existed solely to shield profits, illicit and otherwise, from the grasp of the law or tax authorities.

Countries with cloaked banking systems will “have to respond to pressure,” brought by the U.S., said Randall Dodd of the Washington-based Economic Strategy Institute and head of its Derivatives Study Center, because the U.S. and other wealthy countries “will make it in their interest to cooperate.”

Many of these countries are poor, Dodd notes. “If you look at these tax haven countries they have about 1.5 percent of world’s population; about three percent of the world’s income but 30-some odd percent of the world’s assets,” he said.

CRIME PAYS

Profits from money laundering are staggering. The International Monetary Fund estimates that between $600 billion and $1.5 trillion or two-to-five percent of the world’s annual gross domestic product is laundered each year.

“Rich countries should be able to work with [tax haven countries] and provide development assistance to offset what they will lose by cracking down on these illegal activities,” Dodd said.

But Dodd and others pushing to present a measured, sustainable alternative to these tax haven countries aren’t being heard above the warp and woof of a country at war.

Last week the Senate Banking Committee approved a bill giving law enforcement agencies wide latitude in the fight against money laundering operations. The bill also gives the Treasury Department the authority to take action against uncooperative suspect foreign banks.

However, a measure pressed by Sen. Charles Schumer, D-N.Y., that would have forbid the Treasury Department from doing business with foreign banks that have secrecy laws forbidding them from helping with U.S. investigations, was withdrawn. The bill as written simply permits Treasury to stop dealing with such countries, which Schumer noted had little reason to exist beyond acting as a money laundering machine. Schumer said he would try again to have his proposal added to the bill when it reaches the Senate floor for a vote.

GLOBAL REACH

The U.S. also has brought international efforts to bear on the issue. According to the Treasury Department, 19 countries have already ordered banks to freeze assets of 27 groups and individuals they suspect of being connected to terrorists. Another dozen countries are taking “certain measures” to help track terrorist funding, according to the Treasury Department.

And long known as a sieve for dirty money, the European Union also is stepping up efforts to stem the flow of capital within terrorist linked networks. On September 21st, during an emergency meeting of EU officials, a decision was made to revamp out-dated banking rules to help choke off the illegal streams of money.

The U.S.-led Financial Action Task Force issued a list of non-cooperative countries and territories as standouts for potential banking problems. The list is surprising objective: The Cayman Islands and Russia but it also Israel and the Philippines.

Others on the 2000 list include: The Bahamas, Cook Islands, Dominica, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, St. Kitts, Nevis, St. Vincent and the Grenadines.

The Bahamas, Cayman Islands, Liechtenstein and Panama were removed from the list in June after the Treasury Department determined those countries had cleaned up their act. However, eight new countries were added to the list in June and September: Egypt, Grenada, Guatemala, Hungary, Indonesia, Myanmar, Nigeria and Ukraine.

CHARITABLE TERRORISM

“To cut the lifeblood of Osama Bin Laden and his terrorist group Al-Qaida, we must identify and take action against individuals and Islamic charitable organizations who contribute money to this organization,” James Gurule, Treasury Department Undersecretary for Enforcement, told Congress last week.

During the Afghan war against the Soviets, Arab countries used charities as fronts to funnel money and support to the Afghan rebels. Unsuspecting supporters of the Afghani struggle against the Soviets, contributing to Islamic run charities, were at times unwittingly contributing to gun running efforts from bases in Peshawar, Pakistan to the rebels fighting inside Afghanistan.

“Bin Laden learned how to co-opt charities during his time fighting with the Afghan Mujahedeen,” said an intelligence source. “And he’s been corrupting the goodwill of many Islamic charities for years,” the source said.

“Some Islamic charities have been penetrated, exploited and are now controlled by terrorists involved with Al-Qaida,” Gurule said. These charities operate globally with “multi-million dollar budgets at one end of the spectrum and small, tightly organized front cells at the other,” Gurule said.

It’s impossible for the average person wishing to contribute to ferret out the terrorist links. “They often adopt innocuous names and co-opt legitimate causes,” Gurule said. People giving to such groups “are defrauded and their funds end up diverted to finance terrorism,” he said.

But shutting down and “re-configuring” these organizations is a huge effort, Gurule said, “one which will require intense international coordination and cooperation.”

And the terrorists aren’t always so sophisticated, U.S. investigators said. Terrorists are known to run garden variety scams and frauds to cobble together the funds needed to carry out their efforts. Such frauds include identity theft, ATM theft and mob-style credit card “bust outs” in which stolen cards are maxed out before the credit company is able to deactivate the stolen accounts.

BANKING CULTURE WAR

A global underground banking system that operates off the books, with no paper records of deposit or receipt, is a main currency artery for terrorism, financial experts say.

The centuries old profession of underground or black-market banking is further confounded because many such bankers operate within the law, offering banking type services for religions that prohibit the accrual of interest.

Within the Arabic world the system is called “hawala” and financial investigators say it is a major tributary of bin Landen’s financial dealings.

Hawala, which means “trust,” operates on just that. Money is deposited with a Hawala banker in one country for the purposes of payment to another in a different country. A chit, or code, is given to the intended foreign recipient who then uses that to collect money from a local Hawala banker. The withdrawal is made despite the fact that no money was specifically deposited for the purpose.

The paying Hawala banker simply trusts that at some point a reciprocal “deposit” will be made from his side. Meanwhile, he may issue a chit to disperse money that his counterpart in the U.S. or other country must honor.

“These accounts can generate millions and sometimes billions of dollars in transactions within a given year,” said John Moynihan, a financial forensic technician in congressional testimony last week.

Moynihan said people from every nationality and geographical reference are involved in the practice. Those in North and South American call the underground banking system the “Black Market Peso Exchange,” Moynihan said. They operate on trust, he said.

“It is the number of persons willing to ride or engage in the system, that gives the system its value,” he said. Further complicating the investigation of the underground banking system is the fact that “much of the money transacted in the informal market was earned by legitimate means,” Moynihan said.

The banking bill approved by the Senate Finance Committee last week has a provision aimed directly at such underground banking systems, requiring them to report suspicious activity.

“It is unacceptable that a terrorist today can open the phone book in a number of American cities, find a hawala located in a legitimate business establishment, and walk out with thousands of dollars sent from Afghanistan — with no one to stop him and no record of the transaction,” said Sen. Evan Bayh, D-Ind., who drafted the provision in the banking bill.

But such a bill would only impact hawalas operating inside the U.S. The Middle East is rife with such networks. Worse: The so-called “hawala triangle” of India, Pakistan and Dubai are home to the most nefarious of underground banking channels.

Those countries are “responsible for significant international money laundering activities that go far beyond South Asia,” says a State Department report on money laundering activity. “While interdiction of non-bank money laundering systems, such as hawala, is difficult enough in itself, this difficulty is sometimes compounded by ineffective money laundering countermeasures in Dubai and the other Emirates,” the report says.

And still, even with pumped up laws and a more coherent global cooperation strategy, such efforts to cut off the financial oxygen that sustains terrorism comes down to a crapshoot.

“Of course, we cannot overestimate our chances of success,” said former Treasury Deputy Secretary Stuart E. Eizenstat in congressional testimony. “Financial data alone, no matter how good it is, rarely provides the archetypal ‘smoking gun’ in investigations,” Eizenstat said.

And even the significant amount of money it is estimated to have taken in order to pull off the Sept, 11 attacks “is never large enough even to cause a blip in the daily stream of international cross-border payments,” Eizenstat said.

War Bonds

September 28, 2001

WAMU – American University Radio

Over half a century ago, during World War II, War Bonds boosted both the US economy and the morale of the country. In the wake of September 11, some are suggesting special government bonds be reintroduced to help rebuild New York and finance our new war against terrorism. A look at the economic, political, and social impact of War Bonds.

Sen. Mitch McConnell (R-KY), United States Senate

Randall Dodd, Director of Derivatives Study Center, Economic Strategy Institute; also Professor of Economics, American University

John Steele Gordon, author The Business of America (Walker & Co.); columnist with American Heritage Magazine

Larry Samuel, author of Pledging Allegiance: American Identity and the Bond Drive of World War II (Smithsonian Institution Press

You can listen to the show by clicking on the following icon: http://www.wamu.org/ram/2001/p2010928.ram

Listen in RealAudio!

Federal Securities Agency Hot on Trail of Possibly Attack-Related Profits

September 26, 2001

Mimi Whitefield

Knight-Ridder Tribune Business News

If terrorists or their associates tried to manipulate securities markets in the days before the Sept. 11 attacks and profited as stocks affected by the disaster plummeted, analysts say the money they made has probably already been moved out of the country.

The Securities and Exchange Commission is investigating whether some investors were aware of the attacks ahead of time and used that knowledge to profit in the stock options market, or by short-selling stocks -- selling borrowed shares and buying them back later at much lower prices.

The SEC declined to comment Tuesday on the progress of the investigation, referring to a statement issued last week that said: "We are vigorously pursuing all credible leads but, at this time, we have drawn no conclusion."

SEC Chairman Harvey I. Pitt is scheduled to testify before the House Financial Services Committee today, however, and may be questioned about links between those responsible for the terrorist attacks and securities market fluctuations.

The Chicago Board Options Exchange, the world's largest options market, also is investigating.

Leo Guzman, who heads Guzman & Co., an investment banking and brokerage firm in Miami, says at first he was skeptical there was any connection between the terrorist attacks and market activity.

But after analyzing unusual options trading involving airline stocks and the stocks of two companies devastated in the World Trade Center attack, he says the link seems to be more than coincidental.

"There is enough evidence to be very suspicious," he said. "The options leave a huge trail." The case that terrorists may have sold stocks short, however, is not nearly as convincing, he said.

In the week before two American Airlines and two United Airlines jets were hijacked and crashed into the Pentagon and the twin towers of the World Trade Center, traders on the options markets in Philadelphia and Chicago noticed a sudden surge in the purchase of stock-options contracts that would have gained value if the price of AMR Corp. and UAL Corp., the parent companies of the two airlines, declined.

Essentially, the terrorists would have been betting on the negative impact of an event only they knew was going to occur on stock prices.

Traders' suspicions prompted the SEC probe, which was announced last Wednesday -- two days after the markets reopened following a four-day hiatus in the wake of the attacks.

By that time, however, terrorists or their associates could have liquidated their positions and wired their profits offshore, analysts said.

"My suspicion is the money has already left the country," said Randall Dodd, an economics professor at American University and head of its Derivatives Study Center.

If there was manipulation of so-called put options -- contracts that give the holder the right to sell a security at a specified price (the strike price) by a certain date -- regulators should be able to trace the options trades to the brokers who placed the orders and ultimately to the customers who submitted them.

But if it turns out an order was submitted by an offshore company or a front company the trail may stop there, says Dodd. "The bright light of the audit trail can stop quite quickly and disappear into the shadows, especially if one of these tax haven countries is involved," he says.

Absolute banking secrecy that makes the true owners of offshore accounts difficult if not impossible to trace has been the chief competitive advantage of offshore banking centers. Recently, in the face of international pressure, some offshore banking centers have lifted the veil of secrecy in an effort to combat money laundering. Others, however, have balked.

If terrorists did indeed profiteer from put options, said Guzman, they could have reaped their profits on Sept. 17 -- selling their puts the day the markets reopened. "It was a good time to do it because the market was crashing," he said.

Because options are settled overnight, profiteers could have wired their money offshore the next day, Guzman said.

His theory is that if manipulation of put options did occur, the investors knew their trades would be traceable but gambled that by the time they were tracked, they would have been paid. "Maybe the trail doesn't matter, if the payoff is big enough," Guzman said.

He said the case for that scenario is the most dramatic for American Airlines stock. If, for example, an investor bought an option at $2.20 on Sept. 10 -- the day before the attacks, that investor would have been able to sell it on Sept. 17 for $10.80.

On both those days, there are huge spikes in the volume of put options traded. During August, around 150 American Airlines put options traded each day. During the first week of September the volume was even lower than that. Then on Sept. 10, the trading volume shot up to 1,535 put contracts, each representing 100 shares. On Sept. 17, the volume was 1,219 contracts, before falling off sharply in subsequent days.

Guzman said he found a similar, though not as dramatic, spike in trading volume on Sept. 10 for Marsh & McClennan Cos., an insurance firm with offices in the World Trade Center, and Morgan Stanley Dean Witter, whose WTC offices also were destroyed. The big upsurge in UAL options trading came on Sept. 6.

"The interesting thing is that this (pattern) happened to several companies in different industries," Guzman said.

If there was put option manipulation, said Dodd, and the money is already offshore, it should serve as a lesson for the future.

While the United States has a regulatory environment that permits transactions to be readily traced, he said that's not always the case with offshore banking centers, where record-keeping and regulations may be lax.

"The long-term solution is to establish multilateral financial regulatory agreements with other countries," Dodd said. "In order to bring these transactions into the light, the U.S. needs to support efforts such as the OECD (Organization for Economic Cooperation and Development) initiative on tax havens that will create proper record-keeping and reporting requirements."

If terrorists manipulated markets, money may be gone

September 26, 2001

MIMI WHITEFIELD

Miami Herald