Three New Challenges to Stemming Terrorist Financing, and How Financial Institutions Can Counter Them

In the two decades since the 9/11 tragedy, new technologies have emerged, new laws have been introduced, cryptocurrencies are continuously changing the way money moves around the world, and a global pandemic has radically changed transactional behaviors and processes. This post brings readers up to date on how terrorist financing is evolving in line with current trends and explains what financial institutions can do to most effectively counter criminal activities.

After 9/11, global terrorist incidents peaked in 2014, with 16,908 terrorist attacks¹. They’ve gradually declined since then, but the threat remains just as strong, and the mechanisms being used to enable terrorist financing are evolving fast. Evidence suggests that, in recent years, terrorist organizations have begun using cryptocurrencies to finance their activities. The urgent need to acquire specialized medical equipment and supplies during COVID-19 also created vulnerabilities for fraud, corruption, and subsequent money laundering. Sixty-two percent of compliance professionals say money laundering has become harder to spot over the last 12 months.²

Numerous laws and measures intended to deny financing to terrorist organizations and individuals have been implemented. However, terrorist financing is estimated to account for $800 billion to $2 trillion dollars being laundered annually, according to the International Monetary Fund.³

The Significance of COVID-19 on Terrorist Financing

As noted, the COVID-19 pandemic shook financial markets and heightened the risk of money laundering and terrorist financing in 2020. Some of the more noticeable trends included corporate fraud schemes, unlicensed money-service providers, charity and disaster-related scams, online exploitation of impoverished or financially distressed communities, and forced labor. Financial institutions had to respond quickly to mitigate these emerging risks and safeguard the integrity of their financial systems.

Widespread lockdowns resulted in a significant surge in e-commerce, which was quickly exploited by criminals and terrorists alike. Fake digital storefronts emerged to look like legitimate merchants. “Pass-through companies” or “transaction laundering” became used by illicit businesses using a legitimate merchant platform to process illicit payments. Unfortunately, this “money laundering of the digital age” is becoming increasingly difficult for financial institutions to detect.

The Impact of Taliban in Afghanistan on Terrorist Financing

Despite the Taliban’s takeover of the Afghanistan government, they have done little to distance themselves from international terrorist organizations such as Al Qaeda, and this relationship is expected to accelerate in the near term. Western efforts to curb terrorist financing in Afghanistan have had little effect. Money laundering, economic sanctions evasion, narco-trafficking, and corruption have free reign in the territory now, more than ever.

Following 40 years at war, the illicit economy in Afghanistan accounts for a significant share of production, exports, and employment according to the World Bank. The private sector is awash with people associated with the heroin trade, illegal mining, or smuggling. The Taliban government now controls customs and border crossings as well as central and commercial bank branches. It also manages and can squeeze taxes from Afghanistan’s de facto banking system. It is free to consolidate its taxes on the opium and heroin trade, as well as booming methamphetamine production. It also has access to a windfall of saleable weaponry, which America gave in support to Afghan government forces.

Add to this, the staggering amount of government assistance money now at the Taliban’s disposal. The U.S. Congress appropriated billions of dollars for the fiscal year 2021 to the Afghan government, and billions more were pledged by the International Monetary Fund (IMF). It’s easy to see why a Taliban-led Afghan government creates substantial and imminent challenges for the United States and the international financial community.

Cryptocurrencies for Terrorist Financing

Non-banking services have been a popular funding pathway for terrorist groups for as long as anyone can remember. Even now, new financial technology services are being used as a way to obtain, transfer, and use funds in a way that circumvents traditional financial institutions.  Cryptocurrencies, which offer anonymity, decentralization, and globalization, are no exception. The irreversibility of cryptocurrency transactions and low transaction costs also make cryptocurrencies a popular choice of terrorist funding.

As more and more financial institutions express interest in virtual currencies, they need to consider the evolving dynamics in this area. On the one hand, the transparency and public nature of virtual currencies do facilitate policing and enforcement of illicit activity. However, potential areas of liability are created by the relevant legal framework for combating terrorist funding including under the Anti-Terrorism Act (“ATA”) and the Justice Against Sponsors of Terrorism Act (“JASTA”).

While these considerations are important for companies and banks that provide services related to virtual currency, they also are relevant to any company that could be the target of ransomware attacks. The use of cryptocurrency for financing by terrorist organizations is still in the initial stage, relevant countermeasures are still in the exploratory stage, and theoretical research is, as yet, relatively sparse.

How QuantaVerse Can Help

As the threat for money laundering and terrorism financing continues to increase, so does the risk of global anti-money laundering (AML) non-compliance penalties. More than a dozen banks were penalized in the first half of 2021 and the highest fine imposed was equivalent to $1,250,521,695.⁴

Even though it is estimated that the world’s 10 top terrorist organizations have an annual budget of $3.6 billion⁵, it is important to remember that foreign terrorist fighters only need small amounts of cash to buy travel tickets and other necessary items. Small money movements are notoriously hard to detect in a financial institution’s transaction monitoring system (TMS). However, current AI solutions from QuantaVerse are supplementing traditional TMS to detect fund transfers in any amount that are received in multiple geographic locations over a specific period of time regardless of amount or source.

Once QuantaVerse’s AI solution resolves an entity, it can easily track small-dollar transactions via credit cards, ATM withdrawals, wire transfers, ACH, or branch activity. The key to successful foreign fighter detection by financial institutions is the ability to track the geographic movements of customers over time. AI-enhanced solutions can provide this tactical and strategic solution for financial institutions today and enhance their counterterrorism financing detection and reporting capability.

To learn more about how QuantaVerse can help your financial institution counter terrorist financing, please visit www.QuantaVerse.net.

¹https://academic.oup.com/policing/advance-article/doi/10.1093/police/paab059/6365869

²https://www.lawyer-monthly.com/2021/09/human-trafficking-a-serious-money-laundering-concern-for-financial-institutions

³https://www.unodc.org/unodc/en/money-laundering/overview.html#:~:text=The%20estimated%20amount%20of%20money,goes%20through%20the%20laundering%20cycle.

⁴https://shuftipro.com/blog/basel-aml-index-2021-evaluating-the-risk-of-money-laundering-worldwide

⁵https://www.forbes.com/sites/forbesinternational/2018/01/24/the-richest-terror-organizations-in-the-world/