FinCEN hosts discussion on role of digital assets in terror attacks

On November 2, 2023, the Financial Crimes Enforcement Network (FinCEN) organized a public-private dialogue focusing on the use of convertible virtual currency (CVC) to finance terrorist activity. Officially called a FinCEN Exchange, the event consisted of presentations by FinCEN and federal law enforcement agencies, followed by discussions on information-sharing mechanisms and observations related to terrorism financing. 

Organized in light of the Hamas attacks in Israel on October 7, the Exchange included US financial institutions (FIs), technology firms, and social media companies.

Voluntary information sharing 

Established in January 2021 through the enactment of the Anti-Money Laundering Act of 2020 (AMLA), FinCEN Exchanges aim to “develop, deliver, and sustain innovative public-private information sharing” to help the private sector identify illicit finance risks more effectively. In a readout relating to November’s event, the regulator emphasized the importance of voluntary information sharing among all types of FIs to uncover networks of illicit activities that no single firm can detect alone. As of FY 2023, over 7,600 firms had registered to participate in this initiative.

The role of cryptocurrency in terrorist financing

According to the Financial Action Task Force’s (FATF) report on Crowdfunding for Terrorism, in 2022, there was a notable surge in the adoption of decentralized, blockchain-based operating systems by terrorist organizations and their affiliated fundraising campaigns. A significant number of these groups relied solely on this technology for their operations, and the vast majority received donations in the form of the stablecoin Tether (USDT).

While the true extent of how much crypto is used to fund terrorist activity is difficult to measure, in 2022, a senior legal officer at the United Nations Counter-Terrorism Committee Executive Directorate, Svetlana Martynova, said, “A couple of years ago, 5 percent of terrorist attacks were viewed as crypto-financed or linked to digital assets, but now we’re thinking that it may reach about 20 percent.” 

Crypto terrorist financing activity red flag indicators

To combat this trend, FinCEN highlighted several red flag indicators of potential suspicious activity related to Hamas’ terrorist financing activity in an alert dated October 20, 2023. Of the seven red flags listed, four referenced a nexus with virtual currencies, including:

• A customer conducting transactions with a money services business (MSB) that offers CVC services, operates in higher-risk jurisdictions tied to Hamas activity, and is reasonably believed to have lax customer due diligence (CDD) requirements.
• A customer that is a charitable organization or nonprofit organization (NPO) soliciting donations without appearing to provide any charitable services. In some cases, these organizations may post on social media platforms or encrypted messaging apps to solicit donations, including in virtual currency.  
• A customer conducting transactions with known or suspected virtual currency addresses tied to terrorism or terrorist financing donation campaigns.
• A customer or a customer’s counterparty conducting transactions that contain a nexus to identifiers listed for entities designated by the Office of Foreign Assets Control (OFAC), including email addresses, phone numbers, or virtual currency addresses. 

Since no single indicator can be conclusive of illicit or suspicious activity, FIs should take into account various factors and circumstances to determine whether a behavior or transaction is suspicious. These may include a customer’s financial history and the consistency of transactions with established business practices.

Key takeaways for compliance staff

Firms looking to find out more about voluntary information sharing and how to register under USA PATRIOT Act Section 314(b) should review FinCEN’s December 2020 fact sheet, which highlights additional benefits of the initiative and explains the kind of information that can be shared.

Additionally, in relation to FinCEN’s alert to FIs to counter financing to Hamas and its terrorist activities, compliance staff should take note of the regulator’s request to include the key term “FIN-2023TFHAMAS” in SAR field 2 and the narrative to indicate a connection between the suspicious activity being reported and the alert.