Accountant and certified cryptocurrency expert
Cryptocurrencies like bitcoin have a pseudo-anonymous nature making them attractive for money laundering, terror financing and other fraudulent activities. Cryptocurrency exchanges, where participants buy, sell and/or trade cryptocurrency for cash or fiat, commonly use a peer-to-peer network to validate transactions which are then posted to a public general ledger aka blockchain. Exchange participants can conduct more secure and anonymous transactions off-chain, which do not publicly broadcast details, to hide beneficial ownership. Cryptocurrency exchanges may or may not follow anti-money laundering (AML) and know your customer (KYC) rules for on-chain transactions. In addition, not all countries agree upon the same AML standards and may not apply them equally. Intergovernmental groups such as the Financial Action Task Force (FATF) have proposed global standards for virtual assets, which include cryptocurrencies, that will be formally adopted in June, to help ensure compliance with AML and counter terrorist financing (CTF) regulations.
Sigal Mandelker, U.S. Treasury Under Secretary for Terrorism and Financial Intelligence, recently spoke at a cryptocurrency conference in May and stated that it costs as little as $600 for a suicide bomber to kill dozens of people and cryptocurrencies make it easy to fund attacks. She then gave a warning to the cryptocurrency industry to comply with the regulatory and sanctions regimes saying, "AML/CTF and sanctions expectations should not be viewed as a chore. It should be viewed as a duty serving our national security."
RAND Corporation, a nonprofit, nonpartisan, global policy think tank, recently reported that implementation of CTF strategies have reduced terrorists’ access to traditional funds leading to rising concerns of terrorists using cryptocurrencies. Experts contend that terrorists’ use of cryptocurrencies is still relatively small in scale due to privacy concerns (i.e. public blockchains), lack of access to ATMs to exchange cryptocurrency for fiat and technical sophistication required. Nevertheless, a number of recent examples indicate that terror groups are using bitcoin and other cryptocurrencies as a means to raise funds for their operations.
In January 2019 the terror group Hamas called on supporters to make donations using bitcoin and listed two of their addresses online. Transactions associated with these public addresses were traced to other wallets and various cryptocurrency exchanges that convert to fiat. However, Hamas is moving away from using just a handful of addresses and are now creating new addresses for every new donation made to further conceal their sources of funding and reduce traceability.
Former al-Qaeda affiliate Hayat Tahrir al-Sham (HTS) is a powerful terror group currently occupying the majority of the Idlib province in Syria. HTS has many private donors from the Persian Gulf region who are said to launder funds to the group via small money transfers. (See page 6.) In April, when HTS published one of their weekly magazines, they made a call for bitcoin donations — listing advantages such as anonymity and no restrictions on its use.
While many cryptocurrency exchanges have stated their compliance with AML and CTF regulations, others are operating in unregulated jurisdictions, with no AML and KYC procedures, and may be easily accessed by anyone on the internet. Until there is global compliance of AML and CTF regulations for cryptocurrencies, they will remain at risk for ML and TF activities. In addition, privacy coins such as Monero, which advertise untraceability, will continue to remain at risk for ML and TF regardless of global compliance since they have no centralized authority and lack third- party reporting.
Fraud fighting professionals need to stay informed of new financial technologies and regulations especially ones related to cryptocurrencies. Terrorist organizations represent a class of fraudsters that are ready to exploit new financial technologies for illicit gain. As fraud fighters we must remain vigilant if we want to continue in this fight.