What Bankers Need to Know About Crypto and Terrorist Financing

Terrorism and crypto have an unfortunate connection. Consequently, the pseudo-anonymity of crypto makes funding terrorism easier. At the same time, savvy analysts can use the traceability of the blockchain to their advantage. The blockchain never forgets.

The tools and techniques employed by terrorist organisations to finance their operations are referred to as “terrorist financing”. This cash may originate from sources like business revenues and charitable contributions or through criminal operations including the trafficking of weapons, drugs, or persons as well as kidnapping for ransom.

Counter-terrorist financing (CTF) aims to prevent the flow of funds to terrorist organisations. It is closely related to anti-money laundering (AML). Therefore, one of the main pillars of global counterterrorism policies is CTF. Many governments punish people and sanction entities and states for involvement in terrorism or interacting with others sanctioned for financing of terrorism.

The global efforts and continuous resistance of terrorism leads criminals to constantly seek new ways to circumvent the oversight of the authorities and fund terrorist operations. Of those ways, unregulated and unmonitored cryptocurrency transactions open a window for terrorist funds.

According to the Financial Action Task Force (FATF), blockchain and distributed ledger technologies have the potential to radically change the financial landscape. But, their speed, global reach and above all – pseudo anonymity – also attract those who want to escape authorities’ scrutiny.

How does terrorist financing operate?

Similar to money laundering, there are steps to the process of financing terrorism. Despite the several steps, financing terrorism is done in a manner similar to, and in some instances identical to, that of money laundering. In each instance, the offender aims to use the financial or non-financial sectors for improper outcomes. 

Stage 1 – Raise

Typical terrorist behaviour uses funds raised via various sources to supply terrorist operations. These sources may be legitimate such as private donations, commercial enterprise profits or resulting from criminal activities such as abuse and misuse of non-profit organizations and trafficking in weapons, drugs or people.

Stage 2 – Store

Funds need to be stored at each stage of the Terrorist Finance (TF) cycle. In the crypto-verse, funds are stored in wallets which are identified on the blockchain by a unique address, similar to a bank account number.

A blockchain is a decentralized distributed ledger that stores the ownership records of digital assets on every connected computer. Any data stored on a blockchain is nearly impossible to modify, making the technology a legitimate disruptor in industries such as payments, insurance, ownership, and more. Learn more in our previous article about blockchain technology.

Example of Bitcoin wallet address: 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2.

Stage 3 – Transfer

Transferring the money is the third stage. When the terrorist organisation has all the money needed and an operational necessity, they transfer the money from the store to another location. They transfer their cryptocurrency holdings to another wallet. Money laundering is often associated with this stage of the TF cycle.

Terrorists are most vulnerable during the movement stage, especially that, on public blockchains, transactions are transparent in a way that enables the investigator to use a blockchain analytics tool like QLUE™ to trace the movement of funds between wallets, identifying the transmitter or source wallet and the receiver wallet and storer of mentioned funds.

Stage 4 – Use

The final step in financing terrorism is spending the money. Numerous instances exist of how terrorists have made use of their finances. Purchasing weapons, bomb-making equipments, payment to insurgents, covering living expenses for a terorist group, and many other forms of transactions by terrorist organizations to directly and indirectly support terrorist activities. Some types of usage are also ordinary costs that are challenging to link to terrorism.

Combating Terrorist Finance on the Blockchain

Since the exploitation of the financial system to transfer money is common among the techniques used by criminals to finance terrorists or launder money, financial institutions and business organizations play a critical role in preventing funds from flowing to bad actors or terrorist organizations, and financial institutions most susceptible to exploitation for that reason are banks.

Banks, crypto exchanges and wallets must have sufficient controls and processes in place that allow them to recognise the person they are dealing with in order to reduce risk and protect their enterprise and assets. These controls must include comprehensive KYC (Know Your Customer) onboarding and automated transaction monitoring. 

Many banks embed preventive mechanisms into their compliance and cybersecurity strategy to detect violations and ensure compliance with the current regulations and the guidance of CTF organizations.

Blockchain Intelligence Group helps banks and crypto companies identify their blind spots and reduce their risk with transaction monitoring and risk assessments tools which help screen for connections to terrorist financing on-chain. 

While crypto has a reputation as a weak link in the fight against crime, it has brought the resolution closer on many criminal cases. Sarah Meiklejohn, UCL Professor in Cryptography and Security, says “there’s a steady shift toward seeing cryptocurrency as a tool for prosecuting crimes within law enforcement.”

Blockchain Intelligence Group makes compliance for crypto accessible with an ecosystem of tools with the goal of achieving robust compliance for banks and VASPs looking to capitalize on crypto business growth opportunities. 

Discover how to protect your organization from illicit fund sources and non-compliance risks at www.bitrankverified.com