www.chainalysis.com Open in urlscan Pro
2606:4700:4400::6812:24f4  Public Scan

URL: https://www.chainalysis.com/blog/cryptocurrency-terrorism-financing-accuracy-check/
Submission: On October 23 via manual from IN — Scanned from DE

Form analysis 4 forms found in the DOM

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Crime


CORRECTING THE RECORD: INACCURATE METHODOLOGIES FOR ESTIMATING CRYPTOCURRENCY’S
ROLE IN TERRORISM FINANCING

October 18, 2023 | by Chainalysis Team

Share


In recent days following the horrific terrorist attack by Hamas in Israel, we
have received many questions about how terrorist groups including Hamas,
Hezbollah, and the Palestinian Islamic Jihad are leveraging cryptocurrency. Our
priority is to support our customers in Israel and around the world who are
working to disrupt, freeze, and seize assets that may be used to fund their
activities. But we have also seen overstated metrics and flawed analyses of
these terrorist groups’ use of cryptocurrency, and feel compelled to address
some misconceptions. 

Although terrorism financing is a very small portion of the already very small
portion of cryptocurrency transaction volume that is illicit, some terrorist
organizations raise, store, and transfer funds using cryptocurrency. Terrorist
organizations have historically used and will likely continue to use
traditional, fiat-based methods such as financial institutions, hawalas, and
shell companies as their primary financing vehicles. 

There is no doubt that funds raised by terrorist organizations – no matter how
small – are significant and every method should be investigated. The unique
transparency inherent in blockchain technology makes cryptocurrency particularly
traceable and thus less suitable for illicit activities, including financing
terrorism. Indeed, government agencies and private sector organizations armed
with the right blockchain analysis solutions can collaborate to identify and
disrupt the flow of funds – a feat not easily achievable with traditional forms
of value transfer. In this blog, we discuss common pitfalls in analyzing
terrorist flows on the blockchain, specifically related to identifying and
tracing through service providers.


THE ROLE OF SERVICE PROVIDERS 

There are two key components to analyzing the volume and flow of
terrorism-related funds: quantifying the funds directly in the hands of a
terrorist organization, and identifying the service providers that facilitate
the movement of funds tied to terror financing. 

In order to measure the scale of terrorism financing in cryptocurrency and
identify opportunities for disruption, investigators and other experts need to
understand the role of service providers. When looking at known instances of
terrorism financing, service providers such as money services businesses are
often involved. One such service is the recently sanctioned Buy Cash, a
Gaza-based business that provides money transfer and virtual currency exchange
services. These service providers process volumes of funds greater than a
typical individual and less than a typical exchange. Some may be more akin to
over-the-counter (OTC) brokers while others may be more similar to street-level
money businesses like hawalas.    

For example, when we look in Chainalysis Reactor at the counterparties to a
wallet known to be affiliated with terror financing, we find at least 20
suspected service providers. 

Open in new tab to enlarge.

Each of these suspected service providers have received between $8.4 million and
$1.1 billion in cryptocurrency in total from all of their counterparties. 

Taking a closer look at one of these counterparties, we find more evidence that
it is likely some kind of service provider. 



This address processed over 1,300 deposits and 1,200 withdrawals in 7.5 months.
Of the roughly $82 million in cryptocurrency received by this address, about
$450,000 worth of funds were transferred from the known terror-affiliated
wallet. Given the activity of this address, the person or group of people
controlling it is likely not the same person that controls the terror-affiliated
wallet, but is rather a service provider that knowingly or unknowingly
facilitated the terror financing activity. 


NOT ALL FUNDS RECEIVED BY SERVICE PROVIDERS ARE TERRORIST FUNDS, BUT DISRUPTING
THESE FACILITATORS IS A PRIORITY 

To the untrained eye, it might appear that $82 million worth of cryptocurrency
was raised for terror financing in the example above. But it is much more likely
that a small portion of these funds were intended for terrorist activity and a
majority of the funds processed through the suspected service provider were
unrelated. 

We have seen recent estimates related to the attacks on Israel that appear to
include all flows to certain service providers that received some funds
associated with terrorism financing. In other words, those totals include funds
not explicitly related to terrorism financing. Of course, these service
providers are supporting terrorism by acting as facilitators, and cutting off
terrorist access to them through sanctions or other offensive operations is an
important component to disrupting terrorist finance. But it would be incorrect
to assume all of the transaction activity conducted by those service providers
is related to terrorism.


TRACING THROUGH SERVICE PROVIDERS COULD LEAD TO INACCURATE CONCLUSIONS

Following the flow of funds on the blockchain gets more complicated when someone
sends cryptocurrency to an address used by a service provider. When a user sends
cryptocurrency to any kind of service, the service pools and co-mingles it with
the funds of other users. 

It therefore is often not productive to continue following funds once they’ve
been deposited at a service, as the owner of the funds isn’t usually the one
moving them after that point. Only the service provider knows which deposits and
withdrawals are associated with specific customers, and that information is kept
in their order books, which aren’t visible on blockchains or in investigative
solutions like Reactor. 

Revisiting our example above, we see that 8 of the 20 suspected service
providers that are counterparties to the known terror-affiliated wallet have
also transacted with Garantex, a large Russia-based exchange that was sanctioned
by OFAC in 2022 for its role in laundering illicit cryptocurrency. 

Open in new tab to enlarge.

In addition to inflating the estimates associated with this terror financing
organization, failing to recognize that these addresses are likely service
providers and tracing through them could lead to a further incorrect conclusion
that terrorist funds were cashed out at, or received funds from Garantex.
Realistically, these are just instances where a service provider has processed
transactions for both Garantex and the terror-affiliated wallet.


HOW CHAINALYSIS IDENTIFIES AND MEASURES TERRORISM FINANCING ACTIVITY

Given terrorist organizations’ use of service providers across both traditional
finance and the blockchain, it is very difficult to provide precise estimates
for funds going directly to terrorist organizations, absent information
validated by law enforcement through seizures or other enforcement actions. Even
then, a careful look at the activity of counterparties should be considered. 

Chainalysis labels terrorist financing activity in our data with the utmost
careful consideration. Related to the current conflict, we are working closely
with our customers and partners to analyze any funding to Hamas, Hezbollah, the
Palestinian Islamic Jihad, and any other terrorist organizations. 


WORKING TOGETHER TO FIGHT TERRORISM FINANCING ON THE BLOCKCHAIN

Given blockchain technology’s inherent transparency and the often public nature
of terrorism financing campaigns, cryptocurrency is not an effective solution to
finance terrorism at scale. However, even small amounts of funds sent to
terrorists can do tremendous damage. When investigating small inflows of funds
to terrorism campaigns, law enforcement and intelligence agencies can leverage
blockchain analysis to investigate donors, facilitators, and cash out points and
partner with private sector organizations to shut down activity. This kind of
work has led to seizures of funds related to Hamas, Hezbollah, and other
terrorist groups. These successes demonstrate that it is possible to understand
and disrupt the financial networks that support terrorism. 

In fact, it’s possible that no one understands the challenges of using
cryptocurrency for fundraising better than Hamas. On April 27, 2023, Al-Qassam
Brigades (AQB), the military wing of Hamas, announced the shutdown of their
longstanding cryptocurrency donation program. AQB cited concerns for the safety
of their donors given the prosecution of those who donate through
cryptocurrency.

Private sector organizations also play an important role in shutting down
terrorism financing activity. Exchanges in particular offer the on- and
off-ramps from cryptocurrency to fiat. Conducting Know Your Customer (KYC) due
diligence, as well as monitoring transactions for money laundering and sanctions
risks using blockchain analysis solutions are crucial to preventing terrorists
and other bad actors from using cryptocurrency.

Chainalysis will provide further details on terrorism fundraising activity to
the public as opportunities arise while protecting the integrity of ongoing
investigations. In the meantime, it’s important to fact check analyses
suggesting large totals of terrorism financing and exotic cashout points.  

This material is for informational purposes only, and is not intended to provide
legal, tax, financial, or investment advice. Recipients should consult their own
advisors before making these types of decisions. Chainalysis has no
responsibility or liability for any decision made or any other acts or omissions
in connection with Recipient’s use of this material.

Chainalysis does not guarantee or warrant the accuracy, completeness,
timeliness, suitability or validity of the information in this report and will
not be responsible for any claim attributable to errors, omissions, or other
inaccuracies of any part of such material.

Blockchain analysisFact checkhamasHezbollahisraelNational SecurityPalestinian
Islamic JihadTerrorism Financing
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