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Webinar Recap: Countering Terrorist Financing and its Use of Virtual Assets

Rachel Dettmer : April 18, 2024

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Stacks of different cryptocurrencies surrounded by nodes

Virtual assets have reshaped the financial industry, providing new opportunities for growth and innovation. Payments are easier, faster, cheaper, and for those without access to regular financial products, they provide an alternative banking method.

Yet, they have also created new avenues for illicit activities – providing a perfect breeding ground for terrorist financing. The chilling reality of how cryptocurrency and advanced technologies can be weaponized is a wake-up call for everyone involved in the financial ecosystem.

“The promise of this technology lies in its ability to transfer value across borders at speed. It's ideal for remittances, aid, and more – that's why we believe in it. But who also really loves to move funds faster, in larger amounts, across borders? Criminals.” – Ari Redbord, Global Head of Policy and Government Affairs, TRM Labs.

This recap of our March 2024 webinar further explores the urgent need to address terror financing in the digital realm.

What is Terrorist Financing?

“Terrorist financing encompasses the means and methods used by terrorist organizations to finance their activities. This money can come from legitimate sources, for example, from business profits and charitable organizations or from illegal activities including trafficking in weapons, drugs or people, or kidnapping.” – The United Nations Office on Drugs and Crime.

There are groups of all sizes, both domestically and internationally based, with various grievances, that need to raise funds to support their causes. This type of criminal activity is considered high-risk and is tightly regulated and scrutinized by authorities.

What ARE SOME EXAMPLES OF TERRORIST FINANCING?

The Financial Action Task Force (FATF) lists four examples of terrorist financing:

Through trade and other lucrative activities
Through Non-Government Organizations (NGOs), charity organizations, and levies (including donations, personal contributions, and profits)
Through the smuggling of arms, assets, and currencies by cash couriers
Through drug trafficking.

Why are Virtual Assets Hard to Regulate?

The virtual asset sector is fast-moving, technologically dynamic, decentralized, and global.

While regulatory efforts are ongoing, in March 2024, after a 12-month process of collecting and evaluating information, the FATF released a publication highlighting the different approaches taken by its members and other jurisdictions with materially important Virtual Asset Service Provider (VASP) activity.

It also directly speaks to the challenge at hand. The sector has outpaced regulators and in the absence of a single governing body or standardized regulations across jurisdictions, this has created regulatory arbitrage and a challenging enforcement environment with plenty of loopholes for criminals and terrorists to exploit.

What are Some Recent Trends for Terrorist Financing?

Terrorist financiers are starting to adapt to counter terrorist financing measures and experiment with new technology.

There has been an increase in capability and understanding, resulting in the use of financial tradecraft and obfuscation techniques such as tumblers, mixers, and chain-hopping – making it more complex for counter-terrorist financing professionals to investigate this activity.

Another worrying response to counter-terrorist financing measures is the increase of “lone wolf” actors and self-financed plots, predominantly in the West, in which individuals use a combination of social media, crowdfunding, and crypto wallets to solicit funds from witting or unwitting donors.

Traditional Hawala networks have also started to experiment and engage with cryptocurrency, looking for conversion points to go off-chain and convert to fiat currency. But the prioritized usage for this technology is ultimately to take advantage of moving funds quickly using blockchain technology.

It's important to note that while terrorist financiers are starting to experiment with virtual assets and new technology, these operations are still in the very early stages of adoption and nowhere near as advanced or sophisticated as cyber-criminal groups in Southeast Asia.

While there's significant concern over virtual assets facilitating terrorist financing, it’s ultimately a small piece of a larger puzzle, and any payment method, new or old, that can hold or transfer value continues to be a challenge for combatting terrorist financing.

“If you have a terrorist financing investigation, you will almost certainly have a cryptocurrency investigation, too. The question is no longer 'if' a terrorist group will use crypto but 'when.' While I don't think it's ever going to become the main way to raise or move funds, it will likely be a component of every terrorist group and actor's operations moving forward. We need to be ready for this and set ourselves up to detect the early signs of crypto use.” – Jessica Davis, President and Principal Consultant, Insight Threat Intelligence.

How Can Financial Service Providers Counter these Activities?

Combatting terrorist financing is complicated, and the introduction of new avenues to collect and transmit funds add to that complexity. Traditional finance has built out knowledge and typologies through decades of consistent ideation and action, and this new form of value transfer is not without its own learning curve for compliance professionals.

An example of a current-state challenge is that crypto donations tend to be less than $500 each. Given the parameters for existing controls, simply trying to flag small donations results in a high volume of false positives. Equally, it's hard to determine the intent behind these donations, leaving much of the contextual information about the transaction to be desired.

To compound the issue of semi-ambiguity in current crypto transactions, as technology emerges and crypto continues to expand and integrate into the economy, we will likely see an increase in illicit actors engaging and further adapting to countermeasures.

To counter these activities, institutions must arm themselves with data and information focusing on the identity of actors, donors, and recipients.

Familiarize yourself with these platforms, customer profiles, and what a normal flow of funds looks like to understand how these vulnerabilities and risks develop. Conduct a thorough risk assessment and implement measures such as geographic monitoring, AI and intelligence tools, sanctions screening, and adverse media monitoring in cadenced motions – this isn’t a check-the-box kind of exercise, it needs to be a perpetual motion. What worked yesterday has no guarantee of success tomorrow.

This combination and balance between rules, tools, and human reviews can help create a robust set of controls and measures built for purpose, evidence-based, and in line with international law.

Likewise, there is a plethora of information readily available on how terrorist groups and individuals are using VASPs and digital currencies, from enforcement actions to guidance released through public-private partnerships. In the same way that these groups are continuing to try new methods and utilize new financial instruments, your countermeasure approach to preventing their activity should, too.

Want to hear directly from our expert panel? Access the full webinar here.

Or, if you want to find out more about Surveillance, our AI-powered monitoring platform, simply fill out our contact form, and let's start the conversation.

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