By: Sonny Zulhuda
The use of financial resources by terrorists or for terrorists’ activities gets more sophisticated due to the more ubiquitous Internet, the big data and innovations in payment systems. Innovations including card-based, mobile-based and Internet based.
Virtual currencies (VC) is one type of Internet-based payment system. It brings both hopes and threats. It promises wider reach while provides a powerful new tool for criminals, terrorist financers and other sanctions evaders to move and store illicit funds, out of the reach of law enforcement and other authorities.
Such threats arise due a variety of risks that are inherently contained in the system of virtual currencies, among others:
- Legitimacy risks;
- Anonymity risks; and
- Decentralisation risk.
As VCs are not recognised as a legal tender in major jurisdictions, they are largely based on contractual agreements between the users and providers. Problems may arise if there is no mechanism to ensure the balance of contractual bargaining power.
Secondly, VCs are usually designed to allow the users to conceal their identities. So without names or other customers’ identification, the relationship is non-face to face and is usually anonymous. This enables fraudulent or abusive conduct to go unchecked or untraced.
Lastly, VCs are traded without central system providers. Thus, there is no central oversight body. Therefore, it makes it difficult for the law enforcement and oversight body to monitor.
Given the criticality of counter-terrorism financing mechanism, it is critical for all governments, international bodies and multi-governmental organizations to keep up on the latest innovations in the payment services and systems so as to understand how to best strategize their response. Few strategic steps are necessary starting from the requirements risk assessment, transactions monitoring, due diligence, training and governance. Apart from that, as terrorism threat is an international and complicated matter, external collaboration is necessary, involving law enforcement, regulators, industrial associations, consumers.
On the legislative matter, financial laws need to cover few important things such as updating customer due diligence requirements, regulating businesses dealing in virtual currency and foreign money services businesses, and updating beneficial ownership reporting requirements in suspicious transaction reports. On top of that, the criminal, IT and security laws will need to keep up with the relevant development to remain relevant and effective.
Note: This topic was presented in the Tenth Symposium of the Riyadh-based Islamic Military Counter-Terrorism Coalition (IMCTC) in late October 2020. In this presentation, I also shared some examples or illustrations from the real cases of terrorism financing implicating the use of virtual currencies. It is hoped that the audience obtained some realistic descriptions of the problem, namely the risks of exploiting virtual currencies for terrorism financing.