Risk and Reward: How Shadow Economies Impact the Financial Practices of Militant Organizations
Edition 2 of the Insight Monitor Bookclub
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Review: Amira Jadoon and Daniel Milton, “Risk and Reward: How Shadow Economies Impact the Financial Practices of Militant Organizations,” Terrorism and Political Violence 0, no. 0 (6 Aug 2024): 1–19, https://doi.org/10.1080/09546553.2024.2381211.
BLUF: This article argues that terrorist groups make strategic choices in fundraising. Groups operating in states with large shadow economies will likely adopt intricate, high-yield fundraising tactics over “hit or miss” methods.
Author info: Amira Jadoon, assistant professor at Clemson University, and Daniel Milton, Director of Research at the Combating Terrorism Center at West Point
This article seeks to answer the question of how terrorist and insurgent groups or their leaders decide which fundraising options are the most viable and weigh the risks and benefits of associated methods. The presence of a shadow economy in the terrorist or insurgent area of operations is “one of the most important” factors in determining fundraising choice. How terrorist and insurgent groups raise money can be influenced by resource availability, organizational characteristics, and other strategic considerations (p.3).
The authors put forward a plausible hypothesis. There are plenty of examples of terrorist and insurgent groups using shadow (or informal) economies to raise funds (amongst other things, like creating facilitation and smuggling networks for goods and people). Some key examples include Hamas in Gaza, the Islamic State in both Iraq and Syria, the PKK in Türkiye (and later Europe), the LTTE in Sri Lanka, etc.
The article further differentiates between the types of coordination that fundraising methods require. The authors describe high-coordination, reliable payout strategies, such as drug trafficking and smuggling, and low-coordination, unreliable payout strategies, such as extortion, robbery, and kidnapping. They find that high-coordination strategies are more likely to occur in areas with large shadow economies.
Who should read this article? This article is primarily intended for academics and has utility for policymakers trying to combat terrorist financing and understand strategic choices and decision logic.
How does it advance our knowledge?
1. This article advances our knowledge by mapping the strategic choices of terrorists in terms of fundraising.
2. Policymakers can anticipate terrorist financing methods to focus on drug trafficking and smuggling in areas with large informal sectors.
Methods: This article is based on a case study (FARC in Colombia) and a quantitative study with data from 1998-2012 covering 130 groups. The authors find a statistically significant relationship between many variables in their five models. These models use different dependent variables (fundraising methods): drug trafficking, smuggling, extortion, robbery, and kidnapping. They convincingly demonstrate that terrorist and insurgent organizations are more likely to pursue high-pay, high-coordination activities like drug trafficking if they operate in states that have large shadow economies (p. 15).
The authors' categorization of fundraising activities provides a useful framework for understanding the complexities of illicit financing. However, classifying certain activities as high-coordination or low-coordination merits further scrutiny. While drug trafficking and smuggling are rightly identified as high-coordination activities, several other activities measured—such as extortion and kidnapping—arguably require similar levels of coordination. For example, groups like the LTTE and Al Shabaab have developed intricate extortion networks, including taxation systems, receipt issuance, and management structures to avoid double taxation. A similar dynamic is present in some Islamic State-controlled areas of Africa. Likewise, kidnapping often involves multiple actors across criminal networks, local populations, and entities providing security.1Acknowledging these complexities could enhance the internal validity of the study's findings and provide a more comprehensive understanding of these activities and the strategic choices that terrorists make in funding decisions.
What’s missing: There is a growing body of work on terrorist adaptation (and financing), as well as economics and terrorist financing, that might have some bearing on future work in this area, particularly the work of Sandler2 and Myers.3
The article doesn’t consider the issue of how counter-terrorist financing efforts affect the strategic choices of terrorist groups. To be fair, no existing dataset of these activities exists that can be included in these models. While I think this is a critical issue (arguably one that has the most bearing on financing choices, including financing activities beyond just fundraising), this is also not easy to model. To understand terrorist decision-making and adaptation, this issue will have to be overcome, and counter-terrorist financing activities will have to be included in future models of terrorist behaviour and decision-making.
Finally, the article raises an interesting question of cause and effect. The authors convincingly demonstrate that terrorists exploit shadow economies. However, is it also possible that terrorist and insurgent groups primarily arise in countries that have large shadow economies, possibly indicative of a lack of governance? Or do shadow economies somehow facilitate the development of terrorist groups? Understanding this relationship further might shed more light on how and if terrorists are really making decisions about fundraising or whether they are simply exploiting whatever is available to them.
Readability: Despite using advanced quantitative methods, this article is surprisingly readable and will be accessible to a general audience. Interpreting the results does, however, require knowledge of econometrics.
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Jessica Davis and Alex Wilner, “Paying Terrorist Ransoms: Frayed Consensus, Uneven Outcomes & Undue Harm,” International Journal, September 26, 2022, 00207020221130308, https://doi.org/10.1177/00207020221130308.
Todd Sandler, “An Economic Perspective on Terrorism and Counterterrorism,” Terrorism and Political Violence 0, no. 0 (2023): 1–17, https://doi.org/10.1080/09546553.2023.2259992.
Graham Myres, “Investing in the Market of Violence: Toward a Micro-Theory of Terrorist Financing,” Studies in Conflict & Terrorism35, no. 10 (October 2012): 693–711, https://doi.org/10.1080/1057610X.2012.712031.