CORRECTED VERSION OF PRAGUE 338 -- PART 1: U.S.-EU

UNCLAS SECTION 01 OF 05 PRAGUE 000348

SENSITIVE
SIPDIS

STATE FOR EEB/ESC, EUR/ERA, LA/EBA/BRIAN EVANS
TREASURY FOR GLOBAL AFFAIRS, TFFC, OFAC AND OSP
ICE FOR TF INVESTIGATIONS - JOINT VETTING UNIT/DAVID KANE

E.O.12958: N/A
TAGS: EFIN ETTC EAID KTFN KWBG KPAL KJUS KCRM KNNP PREL
PTER, UNSC, SNAR, EZ, EUN, IR
SUBJECT: CORRECTED VERSION OF PRAGUE 338 -- PART 1: U.S.-EU
COUNTER-TERRORIST FINANCING WORKSHOP: NON-PROFIT ORGANIZATIONS

Ref: A. PRAGUE 338

B. PRAGUE 339

NOT FOR INTERNET DISTRIBUTION


1. (SBU) SUMMARY. This cable contains significant revisions to
Prague 338 and should be regarded as replacing that cable. This is
the first of two cables reporting on the U.S.-EU Terrorism Finance
Workshop held in Prague on May 27-28. In response to U.S.
diplomatic efforts, the Czech Presidency of the European Union (EU),
in partnership with the upcoming Swedish Presidency, hosted the
eighth in a series of expert-level U.S.-EU workshops on combating
terrorism finance. About 120 participants from EU member states and
institutions, the U.S., and the UN Monitoring Team attended the
workshop, which focused on U.S.-EU cooperation in three new areas:
wire transfers, non-profit organizations and new payment methods.
While recognizing differences between the U.S. and EU legal
framework and practice, workshop participants focused on
commonalities and agreed to prepare a common outreach paper to be
approved by the U.S. and EU member states. The next workshop will
take place under the Spanish EU Presidency during the first half of

2010. This cable reports on discussions relating to non-profits
organizations (Part 2 (septel) addresses wire transfers, new payment
methods and ideas for U.S. - EU future cooperation). The European
Commission is exploring possible measures to decrease NPO
vulnerability to terrorist financing abuse, and would welcome
coordination with the USG on how to approach third states (e.g.
Yemen and the Gulf countries). EU participants expressed interest
and some reservations about the U.S. Alternative Relief Mechanism
pilot project in the West Bank. Treasury also highlighted U.S.
efforts against Hamas and Hezbollah, which continue to receive
active support from the Islamic Republic of Iran. END SUMMARY.

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I. Trends and Emerging Threats in Terrorist Financing
--------------


2. (SBU) Workshop participants recognized that while a single
terrorist attack may be relatively inexpensive to carry out,
terrorist groups have high operating costs related to preparation,
infrastructure development, and social services. The U.S. speakers
identified cash couriers and hawalas, criminal and illicit
activities, personal bank accounts, and charities and non-profit
organizations (NPOs) as some of al Qaida and its affiliates' most
common funding mechanisms at the current time. Terrorists also
often find ways to exploit new technology. U.S. presenters
expressed particular concern over e-payments/e-currency, online
gaming and pornography websites, stored-value cards, and mobile
payments.

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II. Implementation of FATF SR VIII: Non-Profit Organizations
--------------


3. (SBU) For the first time in the US-EU TF workshop history, an
entire session was devoted to implementation of FATF SR VIII for
non-profit organizations. Recognizing that NPOs are particularly
vulnerable to terrorist abuse through both diversion and
exploitation of funds, SR VIII sets out an international standard
for compliance. U.S. Treasury's DeAnna Fernandez and Katherine
Leahy - both Policy Advisors at the U.S. Treasury's Office of Global
Affairs/Office of Terrorist Financing and Financial Crimes, chaired
this session and discussed the U.S. experience and efforts in
implementing SR VIII. In particular, Katherine Leahy noted that in
the U.S. Treasury's experience, exploitation is the more commonly
observed practice of the two, aimed at radicalizing vulnerable
populations through the provision of legitimate social and
charitable services. Leahy underscored the importance of stronger
efforts towards global implementation of SR VIII not only in the
U.S.-EU context, but in all regions including South Asia, noting the
first regional conference on the SRVIII in South Asia hosted in New
Delhi in April, 2009, through a USG initiative.


4. (SBU) Turning to the U.S. approach to SR VIII implementation,

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Leahy explained how the U.S. implements the four-prong approach
conveyed in SRVIII, which includes (i) oversight, (ii)
investigation/enforcement actions, (iii) outreach and (iv)
international engagement. The U.S. model for oversight relies on a
combination of supervision at the federal, state, and local levels,
as well as on self-regulation within the NPO sector. However, Leahy
noted that targeted sanctions and other enforcement actions are
usually the most effective tool of this 4-pillar approach to
identify and take action against charities and/or officials
supporting terrorist organizations. Leahy noted that investigations
and enforcement actions require coordination among government
agencies, and sanctions in particular are largely driven by
intelligence. Investigations may feed into prosecutions for
criminal acts, but also use other measures such as sanctioning
through domestic and/or UN designation.


5. (SBU) Leahy particularly highlighted the outreach component as
vitally important in raising awareness of the terrorist threat among
donors and NPOs, creating buy-in among the sector to cooperate on
countering this threat, and maintaining a dialogue aimed at
minimizing these risks. Finally, she introduced the concept of
"alternative relief mechanisms" (covered in more detail in Session
III),which aim to provide a vehicle for donors to give more safely
to vulnerable communities in high risk regions.


6. (SBU) Ben Evans of the Charity Commission for England and Wales
presented one EU member state's approach to the regulation of the
non-profit sector. Evans outlined the Commission's oversight duties
with respect to approximately 200 registered charities, including:
registration, monitoring, and investigating allegations of abuse.
He stressed that the commission does not have authority to pursue
criminal investigations and must depend on law enforcement agencies
when criminal activity is suspected. In the UK example, the
commission relies on the Terrorism Act of 2000, which outlawed
raising, holding or using funds for terrorism.


7. (SBU) Evans agreed with Leahy that the charitable sector does
not generally recognize the risk of terrorist abuse it faces, and
emphasized the importance of public outreach. He stated that no
domestic UK charities had been definitively implicated in attack
planning, but that according to authorities, a "significant
proportion" of CFT investigations involved charities. Recognizing
the danger, the charities commission helps charities conduct more
effective due diligence and is working within the UK government to
coordinate more effectively with law enforcement as part of its CFT
strategy "to identify, disrupt and prevent terrorist and other
serious abuse of the charitable sector."


8. (SBU) In the discussion following the presentation, questions
centered primarily on the intersection of charitable oversight and
law enforcement. Participants sought clarification on whether
investigations into charities have resulted in criminal
prosecutions, the relationship between investigations of NPOs and
national Financial Intelligence Units (FIUs),and, challenges to
domestic designations of charities. Both the U.S. and the UK
presenters noted the need for enhanced public outreach, and in
particular the need to explain more clearly government actions taken
in response to allegations of abuse or exploitation of NPOs.

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III: Development of Alternative Relief Mechanisms for High Risk
Regions (Private-Public Partnership)
--------------


9. (SBU) In certain regions, charitable works run a particularly
high risk of inadvertent or deliberate involvement with terrorists
organizations. The USG relies heavily on enforcement actions to
protect the nonprofit sector from abuse by terrorist organizations,
but most designations inevitably shut down charities that were also
providing some legitimate social services. To mitigate unintended
consequences and meet urgent basic needs, the USG is currently
exploring ways to "backfill" the provision of social and/or
charitable services independent of terrorist-linked organizations.
U.S. Treasury presented an overview of USAID's work in the West Bank

PRAGUE 00000348 003 OF 005


and in particular a recent public-private partnership to develop an
alternative relief mechanisms in such one such high-risk region,
noting that this partnership is a work-in-progress and faces
considerable challenges. Treasury also issues guidance on
oversight, enforcement, and best practices via its Web site and
through numerous outreach conferences.


10. (SBU) In the pilot project that Leahy described, USAID has
entered into an MOU with the American Charities for Palestine (ACP),
an NGO looking to fund education and health services outside of
Hamas-supported channels. In that model, ACP raises money in the
U.S., then works with USAID-vetted NGOs on the ground in the West
Bank and Gaza. The goal is not to create a "white list" of
government approved NGOs, which could introduce another set of
potential hazards and possibly increase their risk of terrorist
exploitation. Rather, the goal is to steer ACP to NGOs that have at
least been cleared to work with USAID from a counter-terrorism
angle, with the overall objective of promoting a neutral,
de-politicized space for humanitarian aid. In another project,
USAID and other U.S. agencies are working to map the providers of
social services and aid in Bangladesh. This project could reveal
gaps in such services, which could then be matched with known
providers.


11. (SBU) Expressing interest in Treasury's overview of the
USAID-ACP pilot project, EU participants:

-- commended the U.S. for recognizing the importance of humanitarian
aid and the complications arising from certain terrorism
designations;

-- requested more information about USAID and other U.S. agencies'
criteria for choosing potential beneficiaries and the vetting
process for both NGOs on the ground and U.S. donors;

-- cautioned that not all EU member states (EUMS) could legally
"pre-approve" or guide certain charities due to their limited
administrative authority;

-- wondered if NGOs faced political consequences when receiving
U.S.-derived funding in lieu of Hamas; and

-- cautioned against "mission creep," worrying that the ACP-USAID
model could undermine the diversity of NGOs if applied to areas
beyond the unique context in Gaza.


12. (SBU) The participants agreed that the U.S. and EU should
continue to explore ways to address the challenge of preventing
terrorist abuse of charities, while ensuring that vulnerable
populations obtain charitable relief if their local charity is
sanctioned for its link to terrorist organizations.

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IV. Transparency and Accountability of NPOs
--------------


13. (SBU) Participants acknowledged that recent cases of NPOs'
abuse by terrorist financiers highlighted the need for the sector's
integrity, credibility, and awareness in protecting itself. In
recognition that transparency and accountability of the non-profit
sector are critical to preventing its misuse for terrorist financing
and other financial crimes, Ingo Weustenfeld of the European
Commission Counter-Terrorism Policy Office and Oldrich Krulik of the
Czech Interior Ministry reported on their institutions' respective
efforts to advance those goals such as commissioning studies, doing
outreach and issuing guidelines for NPOs. According to Weustenfeld,
who reported on the Commission's February 12, 2009 conference with
leaders from the European Non-Profit Associations sector, no EUMS is
fully compliant with FATF SR VIII despite the Commission's support
for reaching such compliance.


14. (SBU) Though an important step forward, the studies conducted
so far have not always demonstrated expected results. For example,
following the December 2005 EU Council meeting that adopted five

PRAGUE 00000348 004 OF 005


principles for NGOs conduct and their interactions with respective
governments, the Commission initiated two studies of the sector to
assess vulnerabilities and examine NPO exploitation for criminal
purposes, including terrorist financing. The first study, already
completed, fell short of providing comprehensive information or
conclusive results. The second, to be published by summer 2009,
attempts to map the 27 EUMS self- and government-regulatory
frameworks for the NPO sector. Its preliminary findings call for
information and best practices sharing, increasing guidance to NPOs
and cooperation between stakeholders and NPOs.


15. (SBU) Many NPOs insist that a "one-size fits all" EU regulatory
solution will not work, given the diversity of individual member
state legal and regulatory systems affecting the sector. The
Commission indicated that it will continue work on this area under
the 5-year "Stockholm Program" on Justice, Freedom and Security, to
be adopted by the Council under the Swedish Presidency. Drawing
from U.S. practices, the FATF methodology, and EUMS experiences, the
Commission is drafting guidelines for voluntary best practices by
NPOs, and intends to continue the dialogue. EUMS will ultimately
decide on the nature of actions to apply EU-wide, as the Commission
does not have the authority to initiate binding legislation on the
EU's charitable sector. (Note: Separately, EU Counterterrorism
Coordinator Gilles de Kerchove asserted that he will push EUMS to be
forward leaning on the Commission initiative.) Another Commission
official, Michael Merker, EC Counter Terrorism Representative to the
EUMS Civ/Mil Cell, Security Policy Unit, recommended that the U.S.
and EU exchange expertise over efforts to engage third countries,
e.g. Yemen and the GCC, in the effort to counter terrorist
financing.


16. (SBU) Workshop participants agreed that outreach to NPOs is
key, but controversial. NPOs are often offended by the implication
that they could be used for terrorist purposes. The Czech Interior
Ministry noted, however, that after an initial negative reaction,
some NPOs came forward with information that could prove useful to
law enforcement and counter-terrorism officials. The Commission and
the Czech Republic will continue to study how to reduce the
opportunity for terrorist abuse of the NPO sector.


17. (SBU) Many workshop participants also noted that one of the
most important yet most under-utilized tools of FATF SRVIII is the
enforcement prong, in particular identifying terrorist-related
targets for designation and implementation of sanctions against NPOs
and their officials who are shown to support a terrorist
organization. One of the current roadblocks to more governments
taking such enforcement actions is governments' ability to use and
protect intelligence in identifying targets and developing
designations. Another hurdle is the political will necessary to
take such actions that would more effectively protect the charitable
sector from terrorist abuse than relying largely on oversight
mechanisms.

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

V. Cases of Iran, Hezbollah, and Hamas Financing
--------------


18. (SBU) U.S. Treasury's Chip Poncy delivered an informal working
lunch presentation on Hezbollah and Hamas financing. He explained
USG views on these groups, the justifications for their U.S.
designations, and the U.S. perception of the EU's position vis-`-vis
Hezbollah and Hamas. While both the U.S. and the EU agree that the
overwhelming percentage of funds raised by Hamas or Hezbollah are
used to provide social services in areas where local governments
fail to supply them, the U.S. views these activities as the means to
gain support for terrorist organizations among vulnerable
populations by creating dependence upon their social services.
However, the social and terrorist activities of these terrorist
organizations cannot be divided into distinct units. Thus, the U.S.
approaches Hamas and Hezbollah as united entities and seeks to
disrupt their global support networks through domestic designations
(under E.O. 13224) and engagement with jurisdictions that actively
support these organizations.


PRAGUE 00000348 005 OF 005



19. (SBU) Throughout the workshop, Poncy repeatedly underscored
that any counter-terrorist financing effort must be considered
within the context of broader counter-terrorism efforts. When
viewed through this lens, it becomes impossible to distinguish
between the "legitimate" activities and terrorist actions of Hamas
or Hezbollah, as they pursue a common purpose. The U.S.
"organizational" approach to Hamas and Hezbollah contrasts with the
EU approach, which generally requires demonstrating a direct link
between financing and a terrorist act or activity. The U.S. would
like the EU to designate Hezbollah as a whole.


20. (SBU) Poncy flagged that Iran remains a state sponsor of
terrorism that provides hundreds of millions of dollars a year to
Hezbollah, increasingly supports Hamas, and fuels terrorist activity
in Iraq. Iran's lack of any form of CFT controls led to its
designation by FATF as country of concern. When combined with its
ongoing weapons of mass destruction threat and financial obligations
under various UNSCRs (e.g., targeted sanctions, activity-based
financial prohibitions and vigilance against Iranian banks inside or
outside the country),Iran presents unparalleled illicit financing
risk to the international financial system. Consequently, Poncy
urged the EU to take the strongest measures possible in implementing
FATF's call for financial countermeasures against Iran, including
obligations under UNSCRs 1737, 1747, and 1803. He noted that the
international community has worked collaboratively to inform
financial institutions of the serious risks of Iran's deficient
AML/CFT regime as identified by FATF, and how best to make decisions
based on FATF guidelines to protect financial systems.

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Comment: Workshop Next Steps
--------------


21. (SBU) This practitioners workshop series, the only one to
address such a wide range of CFT topics in the U.S.-EU CFT
relationship, provides the main outlet for transatlantic experts to
regularly explore challenges in countering terrorist financing.
Following agreement reached during a U.S.-EU meeting under the 2004
Dutch EU Presidency, the U.S. and EU have held eight practitioner
workshops focused on countering terrorist financing from 2005-2009.
Previous sessions focused on bringing about greater implementation
of FATF SR III on targeted financial sanctions and asset freezing.
This May 2009 workshop was turned to new CFT topics, overcoming
great EU reluctance in recent years to fulfill the commitment (see
2004 U.S.-EU Summit Declaration on Combating Terrorism) to discuss
the challenge of terrorist abuse of the nonprofit sector. This
topic will remain internally divisive to the EU in coming months as
they debate any future EU regulatory approach. However, we have
made progress in raising European awareness of the urgency of this
issue and the fact that the solution should not involve solely a
regulatory approach but rather a comprehensive 4-prong approach to
include enforcement actions. The U.S. and EU should continue to
look for ways to engage on this topic.


22. (SBU) Begin comment: EU institutional treaty and bureaucratic
structures will continue to frustrate our best efforts to translate
these expert discussions into operational or policy action. Yet
providing a private space for open, expert-level discussion of what
is (or is not) working in this field is invaluable to laying the
groundwork for long term adjustments to EU and national level
decision-making and implementation. The USG should identify areas
that could provide the best possible added value for this unique
forum, as opposed to FATF (whose membership includes just half of
the EU),such as additional CT and CFT U.S.-EU troikas, public
conferences, or other possible venues. End Comment.


23. (U) Part 2 of this cable (septel) is being transmitted
separately and reports on wire transfers, new payment methods and
ideas for U.S.-EU future cooperation.


24. (U) This cable has been cleared by the members of the U.S.
Delegation.

ThompsonJones