Fragile and conflict-affected states remain particularly vulnerable to terrorism financing (TF) due to weak governance, porous borders, and limited resources. These conditions create fertile ground for terrorist networks to exploit, making legislative reform an urgent priority. Addressing gaps in legal frameworks is essential to strengthen financial defences, disrupt illicit flows, and protect global security.
According to Arctic Intelligence, terrorist organisations in these regions employ a variety of funding methods. Illicit trade, including the smuggling of goods, arms, and natural resources, often generates significant revenue.
Informal taxation and extortion in controlled areas provide further income streams, while legitimate charities may be exploited as fronts for channelling funds. Money laundering through formal banking systems and unregulated networks such as hawala also feature heavily. Many fragile states lack the capability to monitor and counter these operations effectively.
Several structural challenges underpin this vulnerability. Many states suffer from incomplete or outdated anti-money laundering (AML) and counter-terrorism financing (CTF) laws, leaving TF activities outside clear legal definitions. Where laws do exist, enforcement is hindered by under-resourced financial intelligence units (FIUs), limited investigative capacity, and weak judicial systems. Corruption and political instability further weaken governance, while the prevalence of unregulated financial systems undermines oversight. Porous borders and a lack of regional cooperation compound the problem, allowing terrorist groups to move funds and resources across jurisdictions largely undetected.
Legislative gaps provide further opportunities for abuse. In many cases, TF is not criminalised in line with Financial Action Task Force (FATF) standards, limiting the ability of enforcement agencies to act. The absence of beneficial ownership transparency enables terrorists to hide behind complex corporate structures, while the limited oversight of non-profit organisations (NPOs) leaves them open to misuse. Without effective sanctions regimes, states are unable to freeze or restrict the assets of designated individuals and entities.
International frameworks play a vital role in shaping national responses. The FATF sets global AML/CTF benchmarks and conducts compliance assessments, but many fragile states struggle to meet these standards and risk blacklisting. United Nations Security Council Resolutions, such as UNSCR 1373, require states to criminalise TF and implement targeted sanctions, yet compliance is often inconsistent. International donors provide capacity-building support, but lasting progress requires long-term commitment.
Addressing these weaknesses demands comprehensive reform. Aligning national laws with FATF recommendations is crucial, including criminalising TF, mandating customer due diligence for financial institutions, and introducing mechanisms to freeze terrorist assets. Beneficial ownership transparency should be improved through centralised registers, while risk-based regulation of NPOs can protect legitimate activity while deterring abuse.
Institutional capacity building is equally important. Strengthening FIUs, enhancing investigative skills, and improving judicial processes can significantly improve enforcement. Regional cooperation, supported by intelligence sharing and joint operations, can help to address cross-border challenges. Technological tools such as blockchain analysis, artificial intelligence, and advanced data analytics offer further opportunities to detect and disrupt TF activities.
Terrorism financing will remain a persistent challenge for fragile states without sustained legislative, institutional, and international engagement. By closing legal gaps, boosting enforcement capacity, and harnessing technology, these states can better protect themselves—and the wider world—from the destabilising effects of terrorist funding.
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