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FEDERAL AUTHORITIES in the United States and officials in Italy believe that they have uncovered a terrorism financing scheme involving three residents of the Philippines who allegedly hacked into phone networks and sold the access to call centers. Five men arrested in Italy allegedly operated the call centers and funneled proceeds to a charity group run by an individual suspected of funding a Muslim extremist organization. The plot shows how terrorists are adapting their funding methods now that it has become harder for them to use the traditional financial system.

Charges against the Filipino residents were described in a U.S. Justice Department (DOJ) indictment, and the arrests in Italy and the suspected terrorist funding connection were confirmed by Brescia police spokesperson Sara del Rosario. Although this sort of scheme was new to all of the experts interviewed for this article, not one was surprised by it.

“In the past, if you looked at al Qaeda in particular, it was a more hierarchical organization that gave funds for operations and for living expenses to the cells that were going out to commit these attacks,” says Michael Jacobson, senior fellow at The Washington Institute for Near East Policy. But now it’s more common to see start-up cells decide that they want to take action, and “they might go to Pakistan for training, but they’re not being handed the funds or the direction in the same way, and so they’re left to their own devices to raise the money,” he says.

Thus, scams like the phone center fraud ring pop up as a way to finance terror.

Moving the money around has also become more challenging, because of the increased international effort to fight money laundering, which has led to greater scrutiny of large bank transactions. As a result, terrorists are looking for alternative means of transferring funds. Online gambling and virtual worlds are some of the routes cited by as transfer methods by experts, with credit card fraud often being used to raise funds.

Terrorists are opportunists, says Dennis Lormel, Northeast managing director at IPSA International who spent 28 years with the FBI. Terrorists are “getting away more from using paper currency and actual checks, and doing things through electronic transfers and using the Internet,” he says. “So they’re taking advantage of those new technologies, particularly where the new technologies are not regulated as fully as other areas in the financial sector.”

However, terrorist groups continue to use low-tech sources of financing as well, says Jeff Breinholt, a DOJ counterterrorism veteran. For example, he notes that cigarette smuggling has long been a favored method for fundraising by terrorist group Hezbollah.

Baby formula crime rings have been on the rise for years, and drug trafficking continues to be a popular fundraising tool, say experts. And rather than put money into banks, where it can be traced, groups appear to be increasing their use of cash couriers, says Jacobson, who recently co-authored the report The Money Trail: Finding, Following, and Freezing Terrorist Finances.

What these fundraising methods have in common, according to Breinholt, is that they are more challenging for law enforcement to track. For example, in a phone network hacking ring like the one just uncovered by law enforcement, “you’ll have victims of the crime who might help you uncover it, but you’re not going to have a compliance regime like you have in banks,” explains Breinholt.

There’s nothing like the suspicious activity reporting requirement that financial institutions must meet, so law enforcement won’t get any indication of a problem unless the company whose networks were hacked figures out that something is amiss.

Using charities as a front for terrorism financing remains another popular tactic, say terrorism experts. “It’s a very difficult problem because the charities are, in some cases, operating in areas where there’s pressing humanitarian needs and vulnerable populations, and we all want to see funding and support go to those people,” says Marisa L. Porges, international affairs fellow at the Council on Foreign Relations. “So the trick is how to build transparency into the system so that…there’s a clear accountability for funds and efforts and what’s going on.”

Although there are many challenges in ferreting out terrorist financing, including sustaining international cooperation, Jacobson thinks this is an area of counterterrorism where the U.S. government has been relatively effective. Still, more can be done. For example, both Porges and Breinholt find stored value cards to be a vulnerable area, as consumers are not required to report that they have them when crossing borders and vendors aren’t subject to banking regulations. However, Breinholt says that the card industry is performing responsibly and conducting due diligence where needed.

“The challenge for law enforcement is staying ahead of the curve and continuing to monitor and to shut down the new avenues where they come up,” says Breinholt.