On July this year, the Financial Action Task Force (FATF) published a report addressed to the G20 Finance Ministers and Central Banks Governors, summarizing the latest development in anti-money laundering (AML) and terrorism financing (TF) and drawing a short term work program in these fields[i].
Regarding the G20 member States, the FATF points out that, due to a lack of a broadly shared international legal framework to regulate virtual currencies, it is still challenging to ensure a consistent global approach. The G20 Member States are still divided into those which are preparing laws or regulations to encourage financial and technological progress and those adopting measures mostly focused on prohibition. Hence, according to the FATF report, given the highly mobile nature of virtual currencies/crypto-assets, there is a risk of regulatory arbitrage or flight to unregulated safe havens. Furthermore, many national law enforcement authorities still have to improve their understanding of how to effectively conduct investigations of cases involving digital currencies, and how to disrupt criminals.
Another important feature of the report concerns an estimation of a growing link between cryptocurrency and terrorism, due to the evolution of either criminal or terrorist groups’ financing means and capabilities. The 2018 FATF report, referring to the joint FATF/Egmont Group analysis on 106 case studies[ii], demonstrates that third parties financial entities (especially Shell Companies) are a key feature in the schemes designed to disguise ML or TF, dividing them into three groups:
- Shell company: incorporated company with no independent operations, significant assets, ongoing business activities, or employees.
- Front company: fully functioning company with the characteristics of a legitimate business, serving to disguise and obscure illicit financial activity.
- Shelf company: incorporated company with inactive shareholders, directors, and secretary, left dormant for a longer period even if a customer relationship has already been established.
The Dawa infrastructure, front organizations, and the grey zone
Shell Companies and Front Companies (frequently non-profit organizations) cover a central role in terrorism propaganda, radicalization, recruitment, and terrorism financing. There are, indeed, various forms of radical Islam which pursue very far-reaching changes in society, but which do not involve the use of violence.
In these terms, referring to AML or TF, a fundamental aspect to take into account is the broadly use made by terrorist groups of apparently licit front organizations or religious centers to disguise and launder their illegal financial activities: the Dawa infrastructure[iii]. The Dawa’s main idea is based on the core belief that investing in educating Islamic values and social activity may bear fruit to broaden the base of public support in order to: expose Muslims and general public to jihadi ideology; provide international logistic support[iv] to terrorists; grant a legal and legitimate financial resource for local or global Islamic leaders/organizations.[v]
In some cases, the Dawa infrastructure is established around charity organizations (exploiting the Islamic values of charity donation: zakat and sadaqha) which are publicly represented by non-profit companies, Islamic education centers, and hubs for fundraising events.
These front organizations are deeply connected at a public or political level[vi] and represent one of the main provider of financial resources to terrorist groups, even compared to private companies and international or petty crime.
The features which make the global Dawa infrastructure one of the shadiest issue of TF is its unique ability to obscure its purposes either behind a public licit facade or by its ability to hide its illegal financial activities through the so-called “grey zone”. The “grey zone” is the infrastructure that allows terrorist groups to cut the links between legal financial sources, channels used to transfer funds, and the financial aid to the mujahideen. A typical modus operandi which characterizes the “grey zone”, is moving collected funds through a chain of transfers which are later withdrawn in cash to be further transported by couriers[vii].
The Dawa’s politically correct approach is adopted also in online TF. In order to conceal the real purposes of fundraising and avoid blocking, online crowdfunding campaigns for the mujahideen often do not contain direct references to fundraising for TF but use ambiguous language or the pretext of collecting funds for charitable and humanitarian purposes.
Nevertheless, as explained in the International Institute for Counter-Terrorism (ICT) report on “2017 Trends in Cyberspace”[viii], cryptocurrencies are introducing new forms of crowdfunding, making, in most cases, a clear distinction between crowdfunding online campaigns to finance terrorism behind a false intent and those made for explicit militaristic purposes.
- Online charity crowdfunding campaigns, more similar to the Dawa infrastructure politically correct approach (e.g. raise funds for the children of prisoners or to save a mosque from destruction) are carried out on both unregulated or mainstream social websites, where it is encouraged online interactions among users and which usually don’t ask for donations by cryptocurrencies, but for other sort of means of online or cash payments[ix]
- Crowdfunding campaigns requiring donations in digital currencies are more explicit about their TF purposes (e.g. Jahezona campaign explicitly showing that the donations were intended for buying weapons for terrorist groups). Hence, given an inadequate legal regulation on digital currencies, which still allows sending money in complete anonymity, terrorist organizations are using donation campaigns by cryptocurrency to ask for economic support for unambiguous and very clear militaristic ends. In fact, these campaigns don’t encourage interaction among users, but rather provide clear instructions on how to keep themselves as anonymous as possible.
Cryptocurrencies: Haram or Halal?
There is no evidence of transactions of relatively large amounts of money by cryptocurrency to finance Islamic terrorist groups, especially compared to the extensive illegal use of digital currencies perpetrated by small/global criminality or extremist political movements (as neo-Nazi groups[x]).
Indeed, the largest amount of money that terrorist groups raise from donations are those coming from false Islamic charity organizations through crowdfunding campaigns[xi] or from wealthy donors from Gulf countries by direct money or gold donations[xii]. These actors may have avoided a massive use of cryptocurrency to take part in the jihad bil maal[xiii] for reasons related to the instability of the digital-currencies market.
- Economic reason: even though investments in cryptocurrency have proved to be a profitable investment, its price volatility is keeping many investors from entering this new market. The recent Bitcoin sharp hit on June 10 this year, as well as other virtual currencies, after South Korean cryptocurrency exchange Coinrail was hacked losing $42million in value, is just one of the many cases that can increase the perception of how risky could be to transfer and store a large amount of money entirely online[xiv]. Furthermore, Islamic finance emphasizes economic activity mostly based on physical assets, avoiding interest payments and outright monetary speculation.
- Religious reason: all Islamic scholars, given its price volatility, have always referred to cryptocurrency as a form of gambling, thus, haram[xv]. Usually, terrorist front organizations and wealthy donors have to show their belonging to a strictly puritanical form of Islam to get recognition and be influential in the Islamic community, thus they’re not allowed to have the same level of “ideological flexibility” that is typical of terrorist groups.[xvi]
Nevertheless, because of FinTech companies not at all related to radical extremism but rather involved in a very legitimate and innovative business, which are interested in working in growing markets of the Middle East and Southeast Asia, cryptocurrencies are becoming more and more sharia-compliant and safer for Islamic investors,.
- Gold to stabilize cryptocurrencies’ value: A startup based in Dubai, OneGram[xvii], is spreading a new kind of gold-backed cryptocurrency. As Ibrahim Mohammed, OneGram co-founder, explained: “Gold was among the first forms of money in Islamic societies”[xviii]. Thus, OneGram is issuing a cryptocurrency structured in a way that each unit is backed by at least one gram of gold, giving far more stability to its value and obtaining a ruling that its cryptocurrency conforms with Islamic principles from Dubai-based Al Maali Consulting[xix].
- Sharia-compliant Californian FinTech firm: California-based firm Stellar has received certification from The Shariyah Review Bureau (SRB), a leading international Sharia advisory agency licensed by the Central Bank of Bahrain,[xx] for its blockchain platform and its native currency called Lumens[xxi], aiming at integrating the technology into the field of sharia-compliant financial products[xxii]. “Stellar is the first distributed ledger protocol to receive Sharia compliance certification in the money transfer and asset tokenization space… ”. This certification will allow the firm to work with “… Islamic financial institutions in the Gulf Cooperation Council (i.e. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE) and parts of Southeast Asia (i.e. Indonesia and Malaysia)”[xxiii]
Cryptocurrencies impose on authorities the duty to look at Islamic terrorists’ real form
As previously explained, global terrorism is not only made by decentralized groups scattered across the globe, small criminality, and borderline radical ideology but, as proven also by the Dawa infrastructure, it is also made by strong connections with political and religious influential figures and international entirely legal organizations. In these terms, Islamic terrorism should be analyzed as a cohesive entity which accurately calibrates each move in order to hit the takfir (infidels) as hard as possible while gathering public, political and religious support.
Same as the Dawa infrastructure, terrorism financing, can’t be tackled only through the financial sector, but it is a subject which includes sociological, religious, political and military aspects[xxiv].
Terrorist groups’ connections not only with criminal organizations, but also with religious, political, and wealthy radical Islamic leaders or organization could be the missing piece of a broader religious and political justification that has, so far, kept global Islamic terrorist organizations from fully exploiting cryptocurrencies and digital assets.
The developments in these terms should be accurately monitored to prevent Islamic terrorism from warping such a futuristic financial instrument as cryptocurrencies, into an unregulated fertile ground for terrorism financing.
[i] FATF (2018), FATF Report to G20 Finance Ministers and Central Bank Governors, FATF, Paris, France, www.fatf-gafi.org/publications/fatfgeneral/documents/report-g20-fm-cbg-july-2018.html
[ii] FATF – Egmont Group (2018), Concealment of Beneficial Ownership , FATF, Paris, France, www.fatf-gafi.org/publications/methodandtrends/documents/concealment-beneficial-ownership.html
[iii] S. Shay (2008) Somalia Between Jihad and Restoration. Taylor & Francis Group, New York
[iv] C. P. Clarke (August 28, 2017) Hezbollah Has Been Active in America for Decades. RAND Corporation. Available at https://www.rand.org/blog/2017/08/hezbollah-has-been-active-in-america-for-decades.html
[v] Israel Security Agency “Dawa” – Hamas’ Civilian Infrastructure and its Role in Terror Financing. Available at https://www.shabak.gov.il/SiteCollectionImages/english/TerrorInfo/dawa-en.pdf
[vi] G. R. Simpsons (March 18, 2003) List of Early al Qaeda Donors Points to Saudi Elite, Charities. The Wall Street Journal. Available at https://www.wsj.com/articles/SB104794563734573400
[vii] “Social network fundraising with prepaid card Individuals associated with ISIL called for donations via Twitter and asked the donors to contact them through Skype. Once on Skype, those individuals asked donors to buy an international prepaid card (a credit for mobile phone or the purchase of an Apple or other programs or credit for playing on the Internet) and send them the number of this prepaid card via Skype. Then, the fundraiser sent this card number to one of his followers in a neighbouring country from Syria, who would sell this card number at a lower price and give the cash proceeds to ISIL.
Source: Saudi Arabia”
FATF (2015), Emerging Terrorist Financing Risks, FATF, Paris www.fatf-gafi.org/publications/methodsandtrends/documents/emerging-terrorist-financing-risks.html
[viii] International Institute on Counter-Terrorism (July 10, 2018) Trends in Cyberspace. IDC Herzliya. Available at https://www.ict.org.il/Article/2230/Trends_in_Cyberspace_Annual_Summary_2017#gsc.tab=0
[ix] Excet for Al Sadaqah donation campaign. https://www.itstime.it/w/bitcoin-and-other-types-of-cryptocurrency-modern-and-undetectable-ways-to-finance-terrorism-by-daniele-maria-barone/
[x] As claimed by Royal United Services Institute (RUSI) associate fellow, David Carlisle ”Where we probably see more significant adoption amongst extremist actors is amongst political extremists and particular amongst Neo-Nazi groups, who sometimes have an ideological affiliation with this notion of a borderless technology that allows one to operate outside the incumbent system and can be used as a manner of undermining the traditional banking system.” N. Gutteridge (June 18, 2018) BITCOIN TERROR THREAT ISIS terrorists and neo-Nazis using Bitcoin and other cybercash to ‘crowdfund’ global propaganda, experts warn. The Sun. Available at https://www.thesun.co.uk/news/6564841/isis-neo-nazis-bitcoin-funding-terror-propaganda/
[xi] E. Kaplan (April 4, 2006) Tracking Down Terrorist Financing. Council on Foreign Relations. Available at https://www.cfr.org/backgrounder/tracking-down-terrorist-financing
[xii] R. Windrem (September 21, 2014) Who’s Funding ISIS? Wealthy Gulf ‘Angel Investors,’ Officials Say. NBC News. Available at https://www.nbcnews.com/storyline/isis-terror/who-s-funding-isis-wealthy-gulf-angel-investors-officials-say-n208006
[xiii] An Islamic principle according to which the Muslims who can’t fight for the jihad, can contribute by giving money to support the mujahideen.
[xiv] J. Lockett and E. Hyatt (June 12, 2018) GEEK’S GOLD What is Bitcoin, what’s happened to the price and how can you buy the cryptocurrency?. The Sun. Available at https://www.thesun.co.uk/money/3000715/bitcoin-what-is-price-gbp-usd-today-value-cryptocurrency-buy/
[xv] An Arabic word, which means “prohibited”
[xvi] Pro-Al-Qaeda English-language magazine Al-Haqiqa, distributed on Telegram, which, examining the Sharia permissibility of using Bitcoin and similar currencies to fund jihad, stated: “We see lots of potential for the use of cryptocurrencies for our purposes.” S. Stalinsky (March 30, 2018) The Imminent Release Of Telegram’s Cryptocurrency, ISIS’s Encryption App Of Choice – An International Security Catastrophe In The Making. MEMRI. Available at https://www.memri.org/reports/imminent-release-telegrams-cryptocurrency-isiss-encryption-app-choice-%E2%80%93-international
[xviii] Al-Jazeera (April 8, 2018) Islam and cryptocurrency, halal or not halal? The speculative nature of cryptocurrencies has triggered debate among Muslim scholars over its permissibility. Available at https://www.aljazeera.com/news/2018/04/islam-cryptocurrency-halal-halal-180408145004684.html
[xix] An Islamic finance consulting company.
[xxii] B. Vizcanio (July 17, 2018) Cryptocurrency firm Stellar gets Islamic finance certification. Reuters. Available at https://www.reuters.com/article/us-islamic-finance-cryptocurrencies/cryptocurrency-firm-stellar-gets-islamic-finance-certification-idUSKBN1K71RC
[xxiv] P.R. Neumann (July/August 2017) Don’t Follow the Money – The Problem With the War on Terrorist Financing. Foreign Affairs. At https://www.foreignaffairs.com/articles/2017-06-13/dont-follow-money