According to the Global Terrorism Database, there were nearly 8,500 terrorist attacks in 2019, which resulted in over 20,300 deaths. Terrorism utilizes extreme measures, such as assault, intimidation, and kidnapping, to achieve political or ideological goals.
Traditionally, terrorist organizations relied on fiat currency to finance their operations and carry out terrorist acts. As a result, the Financial Action Task Force (FATF), the International Monetary Fund, the United Nations, the World Bank, and other international organizations have helped nation states strengthen their financial construction and carry out anti-terrorism work through regulation and oversight, contributing to the stable development of the world economy and society.
In recent years, there has been evidence that terrorist organizations are using cryptocurrencies to fundraise and transfer funds, which is a significant obstacle to international anti-terrorism efforts. Because terrorist organizations’ use of crypto is still new, relevant countermeasures and theoretical studies are limited. Crypto exchanges today require a robust Travel Rule solution to perform proper counterparty risk mitigation and be able to identify or block a transaction with a sanctioned individual or entity.
This article dives into CTF, its requirements for crypto, its relationship to the Travel Rule, and how Notabene can help VASPs and financial institutions set up a robust framework to prevent transacting with high-risk and sanctioned entities.
Terrorist financing entails soliciting, collecting, or providing funds for terrorist acts or groups. Financiers of terrorism aim to disguise the financing and the activities being carried out. Similar to money laundering, there are generally three stages in terrorism financing: raising, moving, and using funds. Despite the different stages, how terrorism financing is conducted is similar and, in some cases, may be identical to the methods used to launder funds.
An effective CTF framework seeks to prevent, identify, and punish the flow of unlawful funds into the financial system and the financing of terrorist persons, groups, and/or acts. AML and CTF procedures overlap; they target the criminal or terrorist organization's finances and use the financial trail to identify the network's components. This requires monitoring all financial transactions to uncover potentially suspicious transactions.
CTF in crypto includes measures meant to stop criminals from circumventing AML rules via cryptocurrency. This is done by introducing obligations for VASPs to collect and make accessible certain information about senders and beneficiaries of the crypto asset transfers they facilitate, as recommended by FATF’s Recommendation 16, the crypto Travel Rule.
Each jurisdiction has its KYC, AML, and CTF regulations. However, most frameworks are built considering the FATF standards. Across jurisdictions, there is a common expectation that FIs apply their own risk-based approach to minimize risk.
Note the EU's sixth AML directive. Formally known as the European Union Directive 2018/1673, the sixth AML directive defines AML/CTF criteria for all EU countries and can be considered an international reference for regulating AML/CTF practices. The Directive sets the policies and penalties for preventing money laundering and terrorist funding that enterprises in all targeted industries — particularly in the financial and other related sectors — must implement.
The Directive specifies not only all the practices for the prevention of money laundering and terrorist financing that companies in all targeted industries — particularly in the financial and other related industries — must implement but also the penalties that will be imposed if these practices are not followed.
Due to their perceived anonymity, cryptocurrencies attracted terrorist organizations and, in recent years, have begun to adopt them to finance their criminal activities. However, even though people can use cryptocurrency as a technology to launder money, the unbreakable link to ownership can help law enforcement catch criminals. The criminal can run away and hide, but with digital assets, the crime scene, which is the record of the transaction, is permanently locked away in the blockchain.
VASPs are required to take a risk-based approach to customer due diligence. Thus, the due diligence measures required to onboard and maintain a relationship with a customer should vary depending on the case at issue and relevant risk factors. However, AML/CTF regulations usually set a baseline of mandatory KYC measures, such as:
These steps may need to be complemented with enhanced due diligence measures that help financial institutions estimate each client’s virtual currency money laundering risk.
Criminals are very creative in developing methods to launder money and finance terrorism. Since 2017, criminals have laundered about $33 billion worth of cryptocurrencies, with the majority of that amount flowing to centralized exchanges over time. Comparatively, the UN Office of Drugs and Crime estimates that between $800 billion and $2 trillion in fiat currency is laundered annually, up to 5% of the world’s GDP. In 2021, money laundering accounted for only 0.05 percent of all crypto transactions.
Travel Rule compliance is integral to AML/CTF efforts. FATF’s Travel Rule for Crypto Assets mandates that all VASPs send, receive, and sanction screen customer personal information alongside crypto transactions above a certain amount. During a Travel Rule–compliant transaction, VASPs will exchange pertinent KYC information about the customer and run sanction screening on the counterparty customer identity and blockchain address, which could uncover a sanctioned individual or an address linked to transactions with a high risk score. With this information, VASPs choose to accept or reject the transaction. Essentially, complying with the Travel Rule will ensure traceability of crypto asset transfers and greater capability mitigate money laundering and terrorist financing.
Travel Rule compliance will ensure financial transparency on exchanges of crypto-assets.
Notabene is on a mission to make secure and trusted crypto transactions a part of the everyday economy. Using privacy-preserving technology, our full-service software helps virtual asset service providers (VASPs) manage regulatory and counterparty risk in crypto transactions.
Financial institutions and crypto exchanges use our first-to-market FATF Travel Rule solution to identify virtual asset accounts, perform mandated VASP due diligence, and manage regulatory and counterparty risks from one holistic dashboard.
Our software integrates leading blockchain analytics companies like Chainalysis and Elliptic, which track cryptocurrency wallets controlled by criminals like ransomware attackers, terrorist organizations, and terrorist groups.
The following article dissects know-your-customer (KYC) practices, their benefits, and how they relate to the regulation.