Unveiling the Connection between Virtual Currencies and Terrorist Financing

This article delves into the realm of decentralized virtual currencies, which have captured significant attention since their inception. Within this domain, two prominent narratives emerge. The first narrative, and arguably the predominant one, posits virtual currencies as the future wave of payment systems. The second narrative highlights the potential consequences of inadequate regulation, suggesting that virtual currencies offer a potent tool for criminals, terrorist financiers, and sanctions evaders to clandestinely transfer and safeguard illicit funds beyond the reach of law enforcement and other authorities.

Crypto as a form of currency has mass appeal and is now turning into a widespread means of payment, investment, and transfer of funds. However, as it has only been around since 2009, people are still learning the fine details about cryptocurrency. The immediate legislative and enforcement responses to it have not yet caught up with the exponential growth that VC has experienced since its inception. The use of this virtual currency for criminal activities and laundering profits has grown exponentially over the past few years in terms of volume and sophistication. In 2020, government agencies around the world uncovered, investigated, and prosecuted more terrorism financing schemes involving cryptocurrency than ever before. The most notable example came in August 2020, when the United States Department of Justice (DOJ) announced the dismantling of three terrorist financing cyber-enabled campaigns involving the al-Qassam Brigades, al-Qaeda, and ISIS. An investigation revealed that these terrorist groups used sophisticated cyber-tools to assist in financing their operations, including through online solicitation of cryptocurrency donations from supporters around the world. The government has filed three civil forfeiture complaints and a criminal complaint involving the seizure of four websites, four Facebook pages, over 300 cryptocurrency accounts, and millions of dollars.

Tackling the Challenges of Virtual Currencies

The 5th AMLD regards virtual currencies (VCs) as, ‘a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.’ Likewise, terrorist financing is a relatively new era in the world of AML and only became an international security priority after 9/11. This resulted in the FATF expanding the original forty recommendations to include nine additional CTF specific recommendations. The Nine Special Recommendations also set out that countries should provide for the regulation of alternative remittance systems, such as the hawala networks and other informal value transfer mechanisms that sit outside the formal, regulated financial system—a priority that carries relevance for the FATF’s later focus on the digital ecosystems that VCs enable.

Due to the anonymity that virtual currencies provide, they have become the currency of choice for people engaged in terrorism. Terrorism is an expensive undertaking, and thus requires a lot of funding in order for terrorists to be able to carry out their crimes. Virtual currencies have become the payment service of choice for numerous reasons. The most glaring reasoning for this is due to the privacy that surrounds VC. Virtual currencies are traded mainly on the internet, through non-face-to-face customer relationships and allow anonymous funding (cash funding or third-party funding through virtual exchangers that do not properly identify the funding source). A very appealing aspect of virtual currency is that it allows anonymous transfers, as it is difficult to identify who the sender and the recipient are if they are not adequately identified. Over the past decade, the dismantling of finance networks supporting terrorist organizations such as al Qaeda has vastly reduced its funding, which has stunted its activities. The usage of VC has undoubtedly given funding to these groups a new lease of life. Moreover, people can make donations to terrorist groups to aid them in spreading their message.

More and more instances are brought to light, where people are convicted of sending donations to terrorist groups with the use of virtual currencies. There were two major cases that especially highlighted the increased role that VC and donations play in the world of terrorist financing. One of these cases occurred in France, where 29 people were arrested in an elaborate terrorist financing scheme. Dozens of people were arrested as they had bought cryptocurrency coupons worth between $11 and $165. The coupons were credited to accounts that had been opened by Jihadis, who then converted the funds into cryptocurrency. Law enforcement estimated that hundreds of thousands of euros were supplied through this network, which benefited members of al-Qaeda as well as members of the Islamic State group. In 2021, in one of its first cases, a man in the UK was sentenced to twelve years of prison after he had gathered and transferred Bitcoin to jihadist groups, which enabled ISIS militants to escape Kurd-controlled prison camps in northern Syria.

Impact on Criminal Networks

Terrorists also make use of virtual currencies in order to buy and sell goods, in order to further enhance their likelihood to prosper financially. It has been said that some terrorist groups are closely linked to drug traffickers. These links can be witnessed through many forms, such as facilitation, protection, transportation and taxation, some terrorist organizations even resort to trafficking. An example of this can be seen in the Taliban who are said to control the opium fields in Afghanistan. The sale of illegal goods and drug trafficking is assisted by cryptocurrencies, as well as the darknet, which already plays a significant role in cryptocurrency economies.

The volume of bitcoin transactions on a daily basis is incredibly vast, and if terrorists make small donations in the form of VC, it is extremely difficult for law enforcement to identify, making the chance of getting caught much lower than in more traditional settings.

Virtual currencies also allow terrorist groups to buy firearms with a decreased risk of being caught. So far, this has mainly been witnessed in lone wolf terrorists. Lone wolf terrorists tend to buy the necessary firearms on the dark web, as they lack the connections in the established physical arms market. Organized terrorists and lone wolf terrorists tend to use crypto-currencies and other financial security to obscure their funds when buying illegal goods on the dark web as well as to be able to gain a degree of control over the financial entities. Cryptocurrencies allow financial security for terrorists, as bitcoin and other altcoins tend to be irrevocable. The blockchain networks hamper any attempt to recall a verified transaction unless the recipient sends the coin back; this ensures that the chances of the terrorist being scammed are minimized.

Balancing Innovation and Regulatory Challenges

In conclusion, the potential of cryptocurrencies as a technical and financial innovation for the global economy is substantial. However, the absence of effective regulation poses a concerning risk of virtual currencies becoming a sanctuary for criminals and terrorists in their financial transactions. In the short term, it is crucial for countries to adopt the regulatory guidelines established by both the European Union and the FATF. These regulations aim to ensure transparency in virtual asset transactions and prevent the inflow of funds associated with crime and terrorism into the realm of cryptocurrencies. Failure on the part of regulators to address the need for appropriate regulations will only encourage terrorists and criminals to devise innovative methods of gathering funds and eluding law enforcement, ultimately leading to the flourishing of terrorism.

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