Most anti-money laundering laws, and regulatory expectations regarding compliance with such laws, pair up money laundering with terrorism financing when designing and implementing the regulatory and enforcement mechanisms directed at combating financial crimes.   Although money laundering techniques are utilized in terrorism financing activities, there are features unique to financing of terrorism that require highlighting. 

Source of Funds:

The key difference between the two is as follows: the predicate crime generates the illegitimate/illegal funds which requires laundering setting into motion the process of money laundering.  In contrast, in terrorism financing the triggering event is at the end of the chain; i.e. funds are laundered (disguised or obfuscated) first in order to commit the crime at the end of the process.  As such, in case of terrorism financing the source of funds maybe perfectly legal.  This, of course, does not preclude illicit/illegal proceeds from being used for terrorism financing purposes—which frequently is the case. 

Motivation:

Terrorism activities are primarily motivated by religious or political reasons.  Therefore it is essential to understand and investigate potential terrorism financing activities with a broader context in mind.  In contrast, motives such as profiteering, engaging in luxury consumption or enhancing one's influence (for e.g. increasing the size and reach of an organized criminal group), are the primary motivators in money laundering of proceeds of predicate crimes, such as drug trafficking. 

Methods:

The following example further highlights the similarities and differences in money laundering vs terrorism financing.  

Illegal activities such as drug dealing generates multiple streams of cash which need to be collected and sent higher up in the hierarchy of the organization.  One of the methods utilized is smurfing.  Smurfing utilizes several individuals (smurfs) to deposit illegally earned funds in different accounts at different locations which are then pipelined into another account/institution in order to avoid easy detection.

Comparatively, a charitable or religious organization which owns several accounts in different institutions/jurisdictions is likely to deposit charitable donations in such accounts which are often in smaller denominations. The charitable organization then will collect such funds into another account to finance its operations and activities. Although on the surface this may resemble smurfing like activity, further analysis reveals the differences between the two activities: 

• the source of funds—illegally earned as opposed to legally earned donations; 
• the motivation of the actors—profit as opposed to noble charitable motives to help fellow human beings; and 
• the end use of the funds—profit as opposed to for the betterment of society.

Subverting legitimate nonprofit and charitable organizations

Unfortunately, terrorist organizations are prone to use charitable organizations, by subverting the more noble causes for which charitable/non-profit organizations are established and given special privileges by the government.  The terrorist organizations may use charitable organizations as a front to present a benign face to society, mislead charitable donors by purporting to engage in charitable activities, but use the funds collected under the guise of doing charitable humanitarian work to engage in terrorist activities. Such use of charitable/nonprofit organizations by some bad actors, however, should not, prompt compliance professionals to generalize overly about charitable/nonprofit organizations as vast majority of such organizations indeed do much needed humanitarian and charitable work in an effort to genuinely address deep issues afflicting our world.