Money laundering techniques used to finance terrorism
Ever since the tragic events that occurred on the 11th of September 2001, counterterrorism has become a more cohesive subject matter. Almost overnight, counterterrorism was thrust into the spotlight and was no longer considered to be a fringe issue. Prior to the events that occurred, domestic terrorism was the primary area of focus. The attacks that occurred on that day led experts in that field to reconsider their approach to counterterrorism and view terrorism with a more international dimension. As counterterrorism is still in its infancy, experts are still learning about its intricacies.
Over the course of the past twenty years, a lot of focus has been placed on how terrorists finance their crimes. Putting a halt to the funding of terrorism will have a knock on effect and will lead to a decrease in terrorist activities. The main goals of counteracting terrorist financing are the protection of the integrity and stability of the international financial system, cutting off the resources available to terrorists, and making it more difficult for those involved in crime to profit from these criminal activities.
Money laundering is the process of making the proceeds of criminal activity appear to have been legally obtained. According to the World Bank, criminals launder around two to nearly four trillion dollars on a year to year basis. Financing is an especially key step in financing terrorist activities. Terrorism is an expensive undertaking, and as such, the money enables terrorist organizations with the capacity to carry out terrorist activities. The funds that they acquire can come from both legitimate sources (i.e. profits from businesses and charitable organizations) and criminal sources (i.e. Drug trade, weapon smuggling, kidnapping for ransom). While terrorist financiers continue to use cash, gold, and bank wire transfers to raise or move funds, they also increasingly use new and alternative methods. Terrorists have been observed to use virtual assets, prepaid cards, and online crowdfunding websites, which now represent an emerging vulnerability.
Methods used to finance terrorism
Some criminals use the financial system to support terrorists or acts of terrorism. Terrorist financiers and other criminals use the formal financial system, new payment methods such as bitcoin and Ripple, traditional methods of value transfer such as hawala, trade based money-laundering, and cash couriers, particularly in countries with non-existent or weak national anti-money laundering/countering the financing of terrorism (AML/CFT) tools.
Cryptocurrencies have become an attractive method for terrorists to gather funds. Due to the decentralization and anonymity of cryptocurrencies, they have shown potential as a hedge against the financial market as well as the geopolitical risks that are faced by traditional banking. The nameless nature of cryptocurrencies makes it difficult for law enforcement to monitor the funds, where they can raise and transfer illegal funds. The FATF released a report entitled Emerging Terrorism Financing Risks,” which specifically analyzed the terrorist financing risks of virtual currency. This report highlighted that virtual currencies, specifically Bitcoin, have increasingly become “accomplices” to various illegal and criminal activities, facilitating money laundering and terrorist financing. Both the US government and the United Nations have voiced their concern about the potential malign uses of cryptocurrencies by criminal organizations. The U.N. Counter-Terrorism Committee Executive Directorate estimates that the use of cryptocurrencies by terrorist organizations is growing – financing an estimated 20% of terrorist attacks. The uncertainty and volatility that come with cryptocurrencies could have a negative impact on terrorist financing. The lack of predictability surrounding it has led to calls to adopt stronger regulation, which is currently being implemented. This could decrease wider adoption, making cryptocurrencies less viable for terrorist groups.
Hawala is an informal method of transferring money without any physical money actually moving. It has been described as a money transfer without any money movement. Transactions between hawala brokers are made without promissory notes because the system is heavily based on trust and the balancing of hawala brokers books. As this is an informal method, it is challenging to correctly estimate how widespread it actually is. This makes it difficult to study and potentially mitigates the risk of it. Hawala as a method for terrorist financiers poses a lot of advantages. The Hawala system is advantageous to some as it is cheaper for money transmission. According to the FATF, Hawala brokers usually charge between 25 and 50 percent of the equivalent bank charge depending on the destination of the transfer, and generally the customer receives a better exchange rate. Furthermore, the money is transferred faster than if it were to go through the traditional banking system. Where banks can take a couple of days to transfer the money, through the Hawala system, the money can be transferred in a couple of hours. Hawala can sometimes be the preferred method of use, as it can be a cultural tradition for people in some areas. Finally, Hawala is often used in situations where there is a lack of access to the traditional banking system. As a result, they have no option but to rely on the Hawala system to get their funds to the desired destination.
PREPAID CARDS AND ONLINE CROWDFUNDING
A significant amount of terrorist funding is done through prepaid cards as well as online crowdfunding. As technology has fundamentally changed the way that we carry out financial transactions, it has also changed the funding of terrorism. This has made payments a lot easier, but it has also allowed terrorist networks to finance their activities more easily. Prepaid cards have especially simplified the manner in which terrorists can fund their activities in an anonymous manner. Most notably, prepaid cards were used to fund the terrorist attacks in Paris in 2015. The terrorist networks use the illegally obtained funds to purchase these prepaid cards to buy products to introduce their money into the legal financial system. This thus solves two problems that terrorist financiers face. On the one hand, the money has now been cleaned, and these cards can be transported from one country to another without any scrutiny from any relevant authorities. Prepaid cards are advantageous for terrorists as the transaction history can easily be hidden, which makes it difficult to find out the source of the funds loaded into the prepaid card. Funds can be transferred to prepaid cards using different methods, such as phone and online banking.
Criminals are always looking for new ways to facilitate their crimes. Online crowdfunding is one of the newer methods by which terrorists manage to get funds for their crimes. In late 2022, the FBI revealed that some crowdfunding campaigns were raising money for ISIS while masquerading as humanitarian fundraising efforts, and the money raised through these campaigns was transferred to cryptocurrency addresses that were linked to terrorist organizations. The lack of regulation when it comes to crowdfunding has allowed terrorist financiers to utilize this area to their advantage. The FATF has expressed its concern in regards to crowdfunding being abused by terrorists, however, the potential that crowdfunding has in practice for terrorist financing remains unclear.
How to counteract it
A lot must still be done to quell the risk of terrorism. It is important for more diligent checks to be in place in order to minimize the risk of terrorist financing. All methods outlined in this article are removed from traditional banking, and as a result, they are harder to counteract than if they were to take place in the traditional realm of banking. The European Union is already trying to regulate the field of cryptocurrencies with the introduction of the MiCA regulation that will come into effect in the near future. The tightening of the regulations surrounding cryptocurrencies will make it harder for potential terrorists to gain funding. Government regulations on cryptocurrency will likely continue to increase in response to terrorists using the technology to receive funds. As more regulations are implemented, terrorist organizations are likely to start resorting to extortion to procure funds for their operations.
The European Commission has outlined an action plan, in which it hopes to reduce the anonymous character of some segments of the prepaid card market and is examining ways to ensure that compulsory checks, known as ‘customer due diligence’, are carried out in certain circumstances.
The tightening of regulations surrounding both cryptocurrencies and prepaid cards will be interesting to see what happens next for crowdfunding and the role it could play in terrorist financing in the future. With less and less anonymous options available to terrorist financiers, will crowdsourcing play an increased role?