WHERE DOES TERRORISM GET ITS MONEY?
What we found studying how terrorist organisations finance their activities through traditional and emerging financial technologies
By Maria Jofre and Alessia Petrini,
Crime&tech srl
October 2022
Terrorist financing today
All of these cases refer to the transfer of funds to support the activities of terrorist organisations, rather than the direct financing of a specific terrorist attack or plot. Diving into the phenomenon, the report shows that, across the EU, individual donations remain one of the primary means of funding for terrorist and violent extremist organisations. In most of the cases, these money are collected via bank transfers, through the traditional banking system, at fundraising events or using non-profit organisations.
There are multiple every-day tools used for this purpose. For example, studies show that it is still common the use of money transfer services such as MoneyGram and Western Union, or informal value transfer systems such as Hawala, a system based on the activity and honour of a network of money brokers operating outside of traditional financial channels. Sometimes, Internet-based platforms such as Wise and PayPal are also used by terrorist and extremist groups to transfer funds.
In the last few years, FinTechs have been increasingly investigated by EU authorities in cases of terrorist financing, due to the wider use of digital currency, cryptocurrency and virtual assets service providers (VASPs) to support terrorism. Starting in 2020, a shift from money business services to crypto-assets and virtual platforms was reported, with a further increase in 2021. Examples of this include funding platforms operating with cryptocurrencies and prepaid cryptocurrency coupons used for transferring money abroad.
These findings are only partially supported by previous works [1-10], since research and knowledge regarding the emerging use of technologies to finance terrorism are still scarce. Indeed, the general understanding of terrorist financing is based largely on assumptions and anecdotes, more than on empirical research, which could be deceptive or misleading for policymakers.
Financial systems and technologies used to finance terrorism
Thanks to this analysis, we identified three main ways of financing terrorism, using (i) traditional payment systems, (ii) emerging FinTechs and (iii) both in combination.
■ Traditional payment systems
Studying traditional payment systems, we found that they are still the most popular technologies used for this illegal purpose. Indeed, criminals seem to have a great confidence in the use of the banking system, along with the use of cash (Figure 1). In some cases, banks were seen as a safe way to make multiple small-amount deposits, including cross-border transactions.
Financial institutions were also often part of schemes that involved the misuse of legal entities, where bank accounts in the name of shell companies as well as of individuals, were used to invest illegally obtained money to finance terrorist groups. In addition, we found various cases where funds transferred by bank were accompanied by cash transferred by hand. Most of the cases involving the use of cash led to the seizure of a considerable amount of money, usually in combination with drugs and other goods, such as firearms, ammunitions, bombing equipment, incriminating documents, mobile phones, medicines and propaganda material.
Several cases studied also evidenced the use of the Hawala system. A very interesting case we found, showed the scheme of a Hawala operator who not only transferred a significant amount of ransom money from a kidnapping to finance terrorist attacks, but was also involved in setting up a family business that was found to be part of a complex money laundering scheme.
We also found a case where a major network of Hawala operators responsible for transferring funds raised through extortion and levy collection was dismantled by a local law enforcement agency. The investigation revealed details of various Hawala transactions to more than 20 bank accounts in the name of shell companies and individual family members of known terrorists, as well as the recovery of a large amount of cash and incriminating documents related to extortion and investment in properties.
Alternative payments systems we found to be used by terrorist financers include Internet-based payment systems, with PayPal the most commonly mentioned, and e-commerce platforms, like eBay, used both to buy goods needed for terrorist operations, and to sell items to raise cash destined to terrorists. Interestingly, these two platforms were also used in combination. In one case, an unidentified terrorist made multiple payments to a supporter via PayPal and guided him to engage in a scheme by which the supporter could pretend to sell printers on eBay as a cover for the illicit payments.
■ Emerging FinTechs
In spite of the great attention given lately to emerging financial technologies, our analysis found only a few anecdotal records on the use of cryptocurrencies by terrorist financers, probably because of the period covered by the data (2000-2020). We know that many advancements and innovations have occurred in the field of crypto assets since 2020, in addition to the consistent evolution of the regulatory framework in many countries (Hammond & Ehret, 2022). However, we were still able to identify interesting cases, one particularly describing how terrorists made used of a social media platform (Twitter) and cryptocurrencies to collect funds for their organisation, also used to provide online training to carry out subversive activities.
We also found an explicit reference to Bitcoins in three more cases, where terrorists used Twitter to provide material support and instructions on how to use these crypto to mask the provision of funds.
■ Complex schemes
During our analysis, we also happened to encounter a particular scheme, which represents a perfect example to understand how terrorist financing can be a very complex and multifaced crime, leveraging contemporarily on different available FinTechs.
These schemes involved the connection of several elements, including traditional banking systems, cryptocurrencies and money laundering. It all started with the terrorist engaging in a scheme to defraud a banking institution by obtaining a loan based on materially false representations. While doing so, he simultaneously applied for more than a dozen credit cards and further used them to purchase Bitcoins and other cryptocurrencies. The criminal then participated in a money laundering scheme, culminating in several wire transactions to individuals and apparent foreign shell companies.
CTC at the forefront in the fight against the financing of terrorism
To combat the advancing threats and emerging trends in terrorist financing here partially presented, law enforcement agencies and competent authorities must be able to keep pace with financial systems and new technologies. For this reason, the Cut The Cord (CTC) project aims to provide technical solutions based on AI tools to improve law enforcement detection capabilities. In doing so, CTC will implement various AI tools for data acquisition and analysis that will deal with the different technological components of terrorist financing.
The analysis that we carried out as Crime&tech, and the results here described, represent the first step of this process. Collecting updated information on the schemes used for this crime and providing useful knowledge, will allow our consortium to develop the proposed tools (Figure 3) involving various technical elements, such as a platform to analyse cryptocurrency transactions, an infrastructure for monitoring traditional financial transactions, an information exchange system based on blockchain technologies to enhance public and private cooperation, and much more.
The analysis that we carried out as Crime&tech, and the results here described, represent the first step of this process. Collecting updated information on the schemes used for this crime and providing useful knowledge, will allow our consortium to develop the proposed tools (Figure 3) involving various technical elements, such as a platform to analyse cryptocurrency transactions, an infrastructure for monitoring traditional financial transactions, an information exchange system based on blockchain technologies to enhance public and private cooperation, and much more.
Author's Note
This blog article builds on the recently submitted and currently under review manuscript:
- Jofre, Maria and Aziani, Alberto and Villa, Edoardo, Terrorist Financing and the Use of Traditional and Emerging Financial Technologies. Available at SSRN: https://ssrn.com/abstract=4223469
For more information about the project, please visit: https://ctc-project.eu/. You can also join the CTC Stakeholder Community by signing up in the following link: https://ctc-project.eu/community-signup/
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[1] The TE-SAT is considered one of the most comprehensive report on the situation and trends observed in terrorism in EU Member States.
