CAIRO – Saudi Arabia has made “important progress” in aggressively trying to curtail the flow of funds to terrorist groups, but the oil rich kingdom and its Gulf Arab neighbors still remain major sources of financing for militant movements like al-Qaida and the Taliban, according to leaked U.S. government documents.

The findings, detailed in a series of internal U.S. diplomatic cables spanning a period of several years, paint a stark picture of Washington’s challenges in convincing key allies of the need to clamp down on terror funding, much of which is believed to stem from private donors in those nations.

But the cables, obtained and released by WikiLeaks, also offer a window into the delicate balancing act Gulf governments must perform in cracking down on extremist sympathizers while not running afoul of religious charitable duties and casting themselves as U.S. stooges before an increasingly skeptical populace.

“While the Kingdom of Saudi Arabia (KSA) takes seriously the threat of terrorism within Saudi Arabia, it has been an ongoing challenge to persuade Saudi officials to treat terrorist financing emanating from Saudi Arabia as a strategic priority,” reads a December 2009 memo from Secretary of State Hillary Rodham Clinton.

The cable said that while the kingdom has begun to “make important progress on this front, donors in Saudi Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide.”

Saudi Arabia, the homeland of most of the Sept. 11 hijackers, has repeatedly come under U.S. fire for its sluggish response to cracking down on terror financing. It has also been criticized for its reluctance to confront the fiery rhetoric espoused by some of its hardline clerics, which is seen as either directly or indirectly fueling extremism.

Many of the criticisms and observations made in the U.S. documents rehash — albeit more directly — previously stated American concerns.

In July 2009, President Obama’s special representative to Afghanistan and Pakistan, Richard Holbrooke, said that the Taliban get more of their funding from wealthy Gulf donors than from the drug trade for which Afghanistan has long been famous.

Similarly, officials have complained of direct donations by wealthy individuals, particularly during religious months such as Ramadan, or during the hajj. Compounding that issue have been the difficulty of monitoring charities and the reluctance to do so, as well as the abundant informal money transfer networks called hawala.

Despite the concerns, Saudi Arabia emerges in the leaked cables as the most committed of the Gulf nations to working to stem terror financing.

A February memo from the U.S. Embassy in Riyadh said Saudi Arabia has “made important progress in combating al-Qaida financing emanating from the country.” It said reporting “indicates that al-Qaida’s ability to raise funds has deteriorated substantially, and that it is now in its weakest state” since the Sept. 11 attacks.

The cable said, however, that Saudi Arabia’s Interior Ministry “remains almost completely dependent on the CIA.” As a result, it said “our success against terrorist financing in the kingdom remains directly tied to our ability to provide actionable intelligence to our Saudi counterparts.”

Other Gulf nations garner even harsher reviews.

In Clinton’s cable, Kuwait is seen as willing to take action against networks that threaten the country, but “less inclined to take action against Kuwait-based financiers and facilitators plotting attacks outside of Kuwait.”

As a result, Kuwait is described as a “key transit point” that lacks the regulatory framework needed to monitor such activity and a government that is hamstrung by political infighting.

At the time the cable was written, Kuwait was still grappling with fallout from the global financial meltdown. It was unlikely that the government, in the midst of that financial crisis, was willing to open new battles with an already emboldened parliament.

The United Arab Emirates is called to task largely for the same reasons it is famous. One cable says the seven-state federation’s “role as a growing global financial center, coupled with weak regulatory oversight, makes it vulnerable to abuse by terrorist financiers and facilitation networks.”

But the documents offer a window into the reasons why these governments are reluctant to act with the level of zeal the U.S. would like to see.

The cable note that the annual Muslim pilgrimage in Saudi Arabia, or Ramadan, are fertile times for fundraising, and that monitoring and regulation of the charities is lacking.

But Gulf governments, already maligned by militant groups as U.S. lackeys, are likely to be unwilling to be seen as interfering with a Muslim’s religious obligation to provide alms for the needy. The argument, ostensibly, is that individuals may often not realize that they are funding a group that fronts for a militant movement.