As the U.S.-led "war on terror" nears its fifth year, efforts to dismantle terrorist financial networks remain an essential part of Washington's strategy. More than $140 million in terrorists' assets have been frozen across some 1,400 bank accounts worldwide, but experts say terrorist groups have become increasingly adept at eluding detection through use of cash, sophisticated laundering operations, or legitimate front companies. Monetary practices embedded in Muslim culture, such as donating to charities and informal money-transfer centers, have compounded the difficulty in tracking down terrorist financial links. Law enforcement efforts are further confounded by the fact that devastating attacks can be accomplished at relatively low cost.

• Charities. Donations were once the largest source of terrorist funding, coming mostly from charities and wealthy individuals. For years, individuals and charities based in Saudi Arabia were the most important source of funds for al-Qaeda, according to a 2002 CFR Task Force Report. A 2004 update to that report shows Saudi officials have taken steps to disrupt terrorist financing in their country, yet charities continue to play a role in the sponsorship of terrorist groups. "In the Islamic world, there are tens of thousands of charities," says Robert O. Collins, coauthor of the new book Alms for Jihad. While as few as a hundred may sponsor terrorism, "these are some of the wealthiest charities," Collins says. Experts say some of these organizations raise funds with the express intent of supporting terrorists; others seek to promote Islam through legitimate programs, but can be coopted by jihadists who then use the funds to promote their own radical cause.
  
• Illegal Activities. Loretta Napoleoni, an expert on terrorist financing, says the largest source of terrorists' income is the illicit drug trade. Many terrorist groups have supported themselves through other illegal commerce as well. In his book, Illicit, Moisés Naím explains that the terrorists behind the 1993 World Trade Center bombing raised money by selling counterfeit t-shirts on New York City's Broadway, and the perpetrators of the 2004 Madrid train bombings sold counterfeited CDs and trafficked drugs to support their activities. Hezbollah, the Irish Republican Army, and the Basque ETA are also believed to have generated revenue through counterfeiting scams. In 2002, federal agents broke up a methamphetamine ring in a dozen U.S. cities that, according to officials, funneled proceeds to Hezbollah. The Revolutionary Armed Forces of Colombia (FARC) has long used the cocaine trade to finance its operations. Afghanistan's flourishing poppy crops, which the United Nations says are responsible for as much as 86 percent of the world opium supply, are widely believed to be a major source of terrorist funding. Al-Qaeda reportedly profited from the Afghan poppy trade before fleeing the country when the Taliban-led government was ousted in 2001.
  
• Front Companies. Many terrorist organizations attempt to operate legitimate businesses, which generate their own profits and can also be used as a front for money laundering. Ties to terrorism have been found amid the trade of livestock, fish, and leather. Businesses involved in agriculture and construction have also been found to support terrorism. In 2001, the New York Times reported that Osama bin Laden owned and operated a string of retail honey shops throughout the Middle East and Pakistan. In addition to generating revenue, the honey was used to conceal shipments of money and weapons.

One of the pillars of Islam, zakat, is the compulsory giving of a set proportion of one's wealth to charity. While most of these charities in the Muslim world exist to help the poor and spread the message of Islam, they have also been used, particularly in wealthy Middle Eastern nations, to finance jihad.

Weeding out ill-intentioned charities from the benevolent is a difficult task. As Lee Wolosky, a former National Security Council official explains, "There are nefarious charities and there are good charities with nefarious people working for them." The U.S. Treasury Department has been disparaged for shutting down charities that critics contend have no ties to terrorism. In a March 12 Washington Post op-ed, two board members from KinderUSA, a Muslim American charity, bemoaned the government's "assault" on perfectly legitimate charities. London-based Interpal, which funds Palestinian social programs, has been blacklisted by the United States but is still allowed to operate in Britain. Wolosky says "U.S. policy is very clear that no charity can provide money to any organization that may have terrorism as part of their agenda." Under U.S. policy, Interpal's support of the Hamas-run Ramallah-al-Bireh Charity Committee is seen as financing terrorism.

Quite often, terrorists transfer money in plain sight: "If it isn't done through the ordinary banking system, it's done through shell companies," says Bill Tupman, a senior lecturer at the University of Exeter who specializes in transnational crime. In their book, Chasing Dirty Money, Peter Reuter and Edwin M. Truman say financial crime is so widespread that as much as 10 percent of the global GDP is estimated to be laundered funds. Despite heightened efforts to track terrorist financiers, the vastness of the modern financial system means government officials often find themselves looking for the proverbial needle in the haystack.

Another, more traditional means of transfer is also widely used by terrorists. Hawalas are time-honored, trust-based remittance agencies popular across Asia and found throughout the world, particularly in Muslim communities. With no more than a handshake and a password, individuals are able to transfer money across the world.

Though the 9/11 attacks are believed to have cost as much as a half million dollars, most terrorist operations have much more modest budgets. The UN estimates the 2002 bombing of a Bali nightclub cost about $50,000. By comparison, the 2004 Madrid train bombing is believed to have cost between $10,000 and $15,000. The 2005 attacks on London's mass transit system cost about $2,000, says Napoleoni.

The 9/11 attacks brought an international sense of urgency to disrupting terrorists' financial networks. Within a few weeks, the UN Security Council adopted a wide-ranging resolution demanding countries take action to suppress terrorist financing. The following month, the Financial Action Task Force, an intergovernmental body, issued a list of recommendations that became the basis for many governments' efforts. These included passing legislation specifically criminalizing terrorist financing, requiring financial institutions to report suspicious transactions, creating a greater degree of international cooperation in tracking down terrorist financiers, and ratifying the UN convention on financing terrorism, a step that has been taken by 150 countries.

Like several other nations, the United States created a special agency—the Office of Terrorism and Financial Intelligence—to coordinate these efforts. The Patriot Act, along with subsequent legislation, created tough legal measures to combat terrorist financing. Banks must now report any suspicious activities and are also required to check their clients and third parties involved in transactions against a list of suspected terrorists. While these measures have been fairly effective within the United States, Napoleoni says terrorists have simply "shifted all the money to Europe."

The greatest difficulty is that terrorist networks have stayed aware of governments' efforts to stymie their activities and adjust their operations accordingly. Napoleoni says "terrorist financing mutates continuously," which generally keeps terrorists a step ahead of the authorities.

Terrorists have increasingly relied on illegal activities, like smuggling or counterfeiting, to generate revenue that is difficult to track through the financial system. Terrorists have also begun to rely more on cash, leaving less of a paper trail. According to Napoleoni, much of the funding for Abu Musab al-Zarqawi's al-Qaeda organization in Iraq is brought into the country by couriers carrying cash. The July 2005 attacks in London were also funded entirely by cash, which Napoleoni says is untraceable.

The London attacks highlight another development in terrorist finance: the use of domestic sources in planning and funding attacks. The bombings were planned inside Britain by British citizens who raised all the money locally for the attacks. Because the plotters only used cash and didn't cross any national borders, it was difficult to track their financial activities.

Enforcement of new financial laws has also proven difficult. According to the British Bankers' Association, UK banks spend about $430 million each year to comply with anti-terror and anti-money laundering laws. Experts say the U.S. Department of Treasury is overwhelmed by the number of suspicious activity reports it receives, which have risen some 350 percent since 2001.

Because terrorist networks transcend national boundaries, improving international cooperation is essential. "One of the problems of coordination," Wolosky says, "is reaching common ground on 'what is a terrorist organization.'" The UN General Assembly has tried for more than a decade to agree on a definition for terrorism, which would help underpin a comprehensive treaty banning the practice. Beyond that, Napoleoni calls for an international body dedicated to information-sharing and an international court to oversee the terrorism blacklist of individuals and organizations.