Tackling The Role Of Crypto In Terrorist Financing

Crypto offers a decentralised, pseudonymous and borderless means of transferring value, which has both benefits and drawbacks. In the wake of the conflict which erupted between Russia and Ukraine in early 2022, and more recently the horrific assault by the terrorist group Hamas in southern Israel, the use of crypto has once again hit the headlines for its purported role in the financing of terrorist activities.

Crypto And Terrorist Financing

Terrorist organisations have traditionally used fiat-based currency methods to raise and launder funds, including via traditional financial institutions, corporate vehicles, as well as criminal acts and “taxing” of other criminals. Yet the perceived threat for the potential misuse of crypto in this mix has recently increased. The UN Security Council has already reported its “grave concern” at the potential for cryptocurrencies to be “misused, including for terrorist financing”. [2]

In October 2022, the UN Counter-Terrorism Committee Executive Directorate estimated that crypto was used to finance as many as twenty per cent of all terrorist attacks, up from approximately five per cent a few years ago. [3] This is surprising, given that the blockchain technology used by cryptocurrency makes transactions traceable and, one might think, less suitable for the requirement of anonymity that underpins terrorist organisations.

In early 2019, the ‘military’ wing of Hamas, the al-Qassam Brigade, commenced a fundraising campaign via social media channels such as X (formerly Twitter) and Telegram, soliciting crypto donations. Significant deposits of Bitcoin were collected. Using blockchain analysis, the US Department of Justice identified that the accounts typically converted the Bitcoin to fiat currency, or exchanged it for an item of value such as gift cards or pre-paid cards, so that al-Qassam could spend the funds on its terror campaign. [4]

However, the use of crypto in such activities is not new. Hamas’s use of crypto has been on the radar of regulatory authorities since early 2019, as highlighted by the co-founder of Elliptic, a firm whose expertise lies in forensically analysing and tracing digital currency transactions. In addition, according to the Israel’s Ministry of Defense, virtual wallets linked to Hamas have been frozen and seized as a response to the conflict in October 2023, prior to which US$41 million in crypto-linked funds had been received by Hamas between 2019 and 2023. [5]

In recent years, the Palestinian Islamic Jihad (PIJ) Group has also allegedly raised $94 million in financing through the use of crypto. As to be expected, and as reported by Elliptic, blockchain activity of PIJ-affiliated wallets appears to correlate with major conflicts. For example, both the number and value of transactions surged between March 2022 and May 2022, coinciding with an uptick in conflict in the West Bank, which resulted in the death of 17 Israelis and two Ukrainians killed by terrorists.

According to Elliptic, incoming crypto transactions to PIJ-affiliated wallets rose to almost $20 million. Nearly 20,000 transactions took place in May 2022, in comparison to January 2022, in which the same volume of transactions was of an aggregate value of less than US$2.5 million, comprising less than 10,000 [6] total transactions. In October 2023, another cryptocurrency, Tether, reported that it had frozen activity on 32 crypto wallets linked to the conflicts in Israel and Ukraine, representing a combined total value of $873,118. [7]

The above sources display what appears to be a significant use of crypto and digital assets in the use of terrorist financing. However, according to the latest Crypto Crime Report for 2023, published by Chainalysis, the total value of cryptocurrency received by illicit addresses accounted for approximately two to three per cent of the total market. [8]

It is also important to note that some of those firms responsible for the tracing and analysis of crypto transactions suggest that some of the figures quoted by the media in terms of illicit transactions – including those related to terrorist financing – are often grossly overstated. The underlying data can be misrepresented and misunderstood.

There are two important parts to assessing the value and volume of the flow of crypto associated with terrorist financing. The first is assessing the funds that are in the direct hands of terrorist organisations. The second is identifying those service providers that assist in facilitating the movement of funds related to terrorist financing. [9] The media seems to amalgamate each of these aspects, which can lead to ‘double counting’.

It is vital that the media understands the role service providers play in relation to terrorist financing via crypto. When Chainalysis Reactor reviewed an address of a service provider linked to wallets affiliated with terrorist financing, that address had over 1,300 deposits and 1,200 withdrawals in a little over seven months, with a total value of $82 million. However, only about $450,000 of those funds were transferred from the wallet affiliated with terrorist financing. However, without proper tools analysing these transactions, it was easy to arrive at the incorrect conclusion that $82 million was raised by way of terrorist financing. In essence the counter-surveillance laundering techniques resulted in multiple counting of the same value.

Despite the discrepancies between expert crypto investigations and those of the mainstream media, it remains vitally important to investigate all methods of terrorist financing. Attempts must be made to address each method appropriately. More importantly, what are states doing in an attempt to eradicate the use of crypto by terrorist organisations?

The Role Of Law Enforcement

Owing to the legislative disparity between jurisdictions, there is no 'one size fits all’ approach to tackling the use of crypto and assets in terrorist financing. However, major jurisdictions such as the US and UK, and their respective law enforcement agencies, have a pivotal role to play in shaping the regulatory landscape in response to this threat.

The UK has made significant strides in increasing its capabilities here, introducing legislation which provides for more proactive powers of disclosure investigation, and recovery of crypto by law enforcement, rather than the more reactive powers previously available. In October 2023, the Economic Crime and Corporate Transparency Bill received Royal Assent. The implementation of this legislation brings a major reform to how the UK polices and prevents fraud and corruption. One of the key provisions of the new Act provides courts and law enforcement agencies in the UK with enhanced powers to seize and recover suspected criminal crypto assets, including those linked to terrorist activity, under the Proceeds of Crime Act 2002. [10]

In respect of crypto and digital assets, the new law seeks to remove some of the legal hurdles that have been historically present in the seizure of tainted crypto assets. Previously, digital and crypto assets linked to criminal activity could not be seized in criminal proceedings absent an arrest or conviction. This allowed criminals to transfer, move, or otherwise dissipate these tainted digital assets before law enforcement had the legal authority to freeze them. Whilst the new law does not provide law enforcement agencies with the ability to forfeit crypto assets associated with criminal activity until an arrest or conviction has been made, courts now have the ability to freeze these tainted assets on an interim basis prior to an arrest being made. [11]

In addition, the new Act introduces new civil forfeiture powers, meaning that digital or crypto assets linked to criminal activity can be seized, regardless of whether or not the person(s) is convicted of the criminal offences under investigation and/or subject to ongoing legal proceedings. [12]

The US has followed suit in in its approach to combatting terrorist financing via crypto. Executive Order 14067 ‘Ensuring Responsible Development of Digital Assets’ was introduced by President Biden in March 2022, placing stronger emphasis on mitigating and identifying national security risks and the flow of illicit crypto finance, [13] including those related to terrorist financing. The Digital Asset Anti-Money Laundering Act of 2022 was reintroduced in 2023. This Act extends anti-money laundering obligations to a wider variety of individuals and entities in the crypto space. [14]

The introduction of such reformative legislation is of course to be welcomed. However, legislation alone is not enough to tackle the problem. Private sector organisations such as crypto exchanges must also play a pivotal role in the war against terrorism financing. It is paramount to recognise the co-operative relationship required between public sector law enforcement agencies and private sector entities such as crypto exchanges. The US Deputy Treasury Secretary, Wally Adeyemo, is on record as saying the “vast majority” of financial institutions want to help in identifying and combatting terrorist financing.

However, absent real pressure from regulatory and law enforcement authorities, officials are seldom willing to contribute the necessary resources and priority to those tasks which can be seen as an overhead, not a revenue generator. [15]

 

1   https://www.reuters.com/legal/ftx-founder-sam-bankman-fried-thought-rules-did-not-apply-him-prosecutor-says-2023-11-02/
2   https://www.jonesday.com/en/insights/2023/06/cryptocurrencies-and-risk-under-the-antiterrorism-act#:~:text=The%20U.N.,for%20terrorist%20financing.%22%20The%20U.N.
3   https://www.bloomberg.com/news/articles/2022-10-31/un-finding-more-cases-where-crypto-involved-in-terror-financing?leadSource=uverify%20wall&sref=3REHEaVI#xj4y7vzkg
4   https://www.justice.gov/opa/pr/global-disruption-three-terror-finance-cyber-enabled-campaigns
5   https://www.france24.com/en/middle-east/20231022-is-cryptocurrency-helping-hamas-fund-terrorism
6    https://hub.elliptic.co/analysis/israel-orders-seizure-of-crypto-wallets-worth-94-million-linked-to-palestinian-islamic-jihad/
7   https://www.coindesk.com/business/2023/10/16/tether-freezes-32-addresses-linked-to-terrorism-and-warfare-in-israel-and-ukraine/
8   https://go.chainalysis.com/rs/503-FAP-074/images/Crypto_Crime_Report_2023.pdf
9   https://www.chainalysis.com/blog/cryptocurrency-terrorism-financing-accuracy-check/
10   https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/fact-sheet-cryptoassets-legislation
11   https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/fact-sheet-cryptoassets-legislation
12   https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/fact-sheet-cryptoassets-legislation
13   https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
14   https://kpmg.com/us/en/articles/2023/financial-crimes-in-digital-assets.html#:~:text=your%2Dcustomer%20requirements.-,The%20%E2%80%9CDigital%20Asset%20Anti%2DMoney%20Laundering%20Act%20of%202022%E2%80%9D,been%20anonymized%20using%20these%20technologies.
15   https://www.reuters.com/business/finance/us-says-some-digital-asset-firms-not-doing-enough-stop-illicit-finance-2023-10-27/