Journal of Money Laundering Control

The use of crypto-currencies in funding violent jihad

Angela S M Irwin George Milad
Article information:
To cite this document:
Angela S M Irwin George Milad , (2016),"The use of crypto-currencies in funding violent jihad", Journal of Money Laundering
Control, Vol. 19 Iss 4 pp. -
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http://dx.doi.org/10.1108/JMLC-01-2016-0003
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 The use of crypto-currencies in funding violent jihad

1. Introduction

Terrorism financing is the process by which terrorists obtain funds in order to perform acts of terror.
Terrorist groups require financial support to carry out their activities and to achieve their goals. A
successful terrorist group, much like a criminal organisation, is one that is able to build and maintain
an effective financial infrastructure. In order to do this, the group must develop sources of funding
and means of obscuring the links between those sources and the activities that they support.
Terrorist groups use techniques similar to those employed by money launderers to evade the
attention of authorities' and protect the identity of sponsors and beneficiaries of funds.

International terrorism is highly dependent on good cash flow. Cash is required for the purchase of
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everything from supplies and munitions to supporting the families of deceased fighters (Blanchard
and Prados 2007; Roggio 2015; Department of the Treasury Washington D.C. 2015). Terrorist
organisations have traditionally obtained funds through voluntary donations and the collection of
membership fees, drug dealing, credit card fraud (Makarenko 2004; Durmaz 2007), human
trafficking (Durmaz 2007; Gonzalez 2013) and cybercrime (Nardo 2006; Chargualaf 2008). The
Islamic State (IS) has been very creative and business-like in their ability to raise funds (Chulov 2014).
They obtain funds from activities such as hostage taking, extortion, theft and resale of oil and bank
robbery (Levitt 2014). In 2014, ISIS was reported to hold over $2 billion dollars in its coffers (Chulov
2014). However, we do not have a clear understanding of how these funds are transferred to the
areas where the funds are needed most.

The most challenging aspect of organising international terrorist activity is rooted in financial
transactions. Terrorist organisations traditionally use Hawala (or Hundi1) networks, conventional
banking systems and smuggling of cash over borders to fund their activities.

Hawala is a funds exchange system which evolved in Indian and Chinese civilisations and was used to
transfer funds across borders in a safe and convenient manner. Merchants wishing to send funds
back to their homelands deposited funds with a hawala broker, who owned their own trading
business, and for a small fee the broker would arrange for the funds to be available from another
hawala broker in another country. The two hawala brokers then settled accounts through the
normal process of trade. Today, the technique works much the same way, with businesspeople in
various parts of the world using their corporate accounts to move money internationally for third
parties. The practice of hawala is vulnerable to terrorism financing and money laundering as funds
do not actually cross borders, removing the international money trail. Additionally, records are not
stringently kept providing high levels of confidentiality to the sender and receiver of funds.

While hawala transactions are efficient and difficult to trace, they are inefficient for the collection of
funds from multiple sources and disbursement of those funds onwards to geographically dispersed
endpoints. Hawala can also slow down the process of funding, planning and implementing attacks as
it can be difficult to find intermediaries who can be trusted to transfer funds without informing
authorities of suspected illicit activity.

In recent years, the use of conventional banking systems has been problematic for terrorist
organisations. This is due to the strict anti-money laundering and counter terrorism financing
(AML/CTF) regulations that have been put in place since the 2001 terror attacks in the United States

1
Hundi in Pakistan

1
 of America. Before the 2001 terror attacks, some countries, such as those in the Middle East and
Africa, had no laws in place criminalising money laundering and terrorism financing activity (FATF-
GAFI 1999). A lack of effective AML/CTF laws and regulations allowed terrorism financing to go
unmonitored as money transmitters’ were not required by law to register their transactions (FATF-
GAFI 1999). In recent years, however, considerable progress has been made in this area with the
introduction of stronger AML/CTF regimes and increased levels of inter-agency co-operation and
support. This has enabled governments and law enforcement agencies to more effectively detect
and prosecute money laundering and terrorism financing activities by identifying suspicious matters,
unusual business dealings, use of placement techniques and international wire transfers of any
value.

Know Your Customer (KYC) and Customer Due Diligence (CDD) provisions are important
requirements under the AML/CTF regime. The primary purpose of KYC and CDD provisions are to set
out appropriate customer identification procedures for customers of a reporting entity. This is
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extremely important as knowing a customer’s identity and developing an understanding of the

customer’s expected financial activities are vital elements in determining the money laundering and
terrorism financing risk posed by that customer.

While conventional banking is a quick and efficient way of transferring funds nationally and
internationally, the advancement in AML/CTF regulations exposes terrorist organisations, and those
who wish to support these organisations, to oversight by banks, law enforcement and intelligence
agencies which may threaten their operational security.

Physical cross-border transportation of currency has and still does appear to be a method favoured
by terrorist organisations, jihadists and terrorism financers. It is claimed that Islamic State use
middlemen across the Middle East to smuggle cash into and out of its territory (Di Giovanni,
Goodman & Sharkov 2014). This claim is supported by Abu Hajjar, a high-ranking leader of Islamic
State, who stated in an interview with British broadcaster, BBC2, that he has smuggled hundreds of
thousands of dollars in cash to IS fighters (Money Jihad 2015).

In the past, the border between Turkey and ISIS-held territories of Syria was an extremely easy route
for smuggling cheap oil, weapons, foreign fighters and cash to Islamic State (Bertrand 2015).
Although Turkey has now tightened up its relaxed border protection policies, it is extremely difficult,
if not impossible, for them to protect the nation’s 565-mile border that it has with Syria as they
“cannot put soldiers at every point along the border” (Mehmet Seker in Köksal 2015).

Despite the fact that the border between Turkey and Syria is proving problematic in stemming the
flow of cash and goods to ISIS, individuals that physically transport cash across borders are at
increased risk of detection due to tightened border security policies and practices worldwide. For
example, a 28-year-old British woman was sentenced to a 28-month prison sentence for attempting
to smuggle 20,000 euros to her husband, a member of Islamic State, by concealing it inside her
friend’s underwear. Her friend was asked to smuggle the cash into Turkey, where it would be
transported onwards to Syria. The plot was discovered when her friend was stopped in a routine
inspection at London’s Heathrow Airport (Laville & Gardham 2014). On the 28th August 2015, five
men were arrested at a Johannesburg airport with $6 million2 stuffed into twelve bags. It is reported
that at least one of the arrested men made this journey every two days for a full year and that the
funds were destined for the ISIS caliphate in Syria and Iraq (Tilsley 2015).

The Islamic State released a video entitled ‘Return of the Golden Dinar’ in September 2015, in which
it declares that ISIS is in the process of issuing its own currency, the dinar. The ISIS currency is
2
23 million South African rand and $3.77 million USD

2
 available in golden dinars, silver dirhams and copper fulus (Moore 2015) and is funded by terrorist
activities (Duhaime 2015). Islamic State suggests that buying the new ISIS dinar will be a good way
of supporting the organisation. However, those purchasing the ISIS currency will fall foul of
AML/CTF laws as its use will constitute terrorism financing.
It is evident that all of the current and proposed terrorism financing techniques employed by
terrorist groups, and their supporters, pose significant operational and security risks and difficulties.
For some time, the Islamic State has been looking to new and emerging payment technologies in
order to mitigate some of these risks. For example, supporters of ISIS, jihadists and terrorist
organisations have posted YouTube videos, discussion forum links, and links to research on the
anonymity provided by Bitcoins3 (Combatting Terrorism Center 2014). In an article entitled “Bitcoin
and the charity of violent struggle”, the author calls for sympathisers around the world to fund a
global jihadist campaign using Bitcoins (Wile 2014). He advises how Bitcoins can facilitate the
anonymous transfer of funds which suits the needs of an “army in jihad” (Delaney 2014). Direct
references are made to using digital currencies to transfer funds into countries where conventional
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or traditional methods of financial transactions are difficult due to lack of network capacity or
surveillance and regulation. In June 2015, an American teenager pleaded guilty to teaching
members of ISIS how to use Bitcoin (Edwards 2015). He provided instructions on how to set up a
Bitcoin wallet for would-be donors and provided tips on how to use Dark Wallet services. The teen
had over 4,000 Twitter followers (Edwards 2015).

In November 2015, computer hacktivist and anti-terrorism group, Ghost Security Group, claimed to
have found a chain of transactions to Bitcoins wallets believed to be owned and operated by ISIS.
The total amount of funds held in the wallets were reported to be between $4.7 million and $15.7
million, representing between one and three percent of the group’s total annual income4 (Nauert
2015). Similar claims were reported by Deutsche Welle in September 2015 when they reported that
one Bitcoin wallet believed to belong to ISIS received around $23 million within one month (Sanders
2015). Ghost Security Group confirmed to NewsBTC that ISIS is "extensively using Bitcoin for
funding their operations" and that the group has "managed to uncover several Bitcoin addresses
used by them". Furthermore, that Bitcoin is "their prime form of cryptocurrency" (Sameeh 2015).
No solid evidence was provided by the Group to support their claims, such as Bitcoin wallet
addresses, as they claimed that the matter was still under investigation.

There is also evidence to suggest that Bitcoins have been utilised in a number of successful terror
attacks. The first was in two bombing attacks conducted by an ISIS-inspired lone wolf on a shopping
mall in Jakarta, Indonesia in 2015 (Pick 2015) and the second was in the November 2015 co-
ordinated terror attacks in France. Ghost Security Group claims that they analysed an enormous
amount digital data in the aftermath of the French attacks in an attempt to track the movements of
those responsible. They report that their investigations of the attackers led them to a Bitcoin wallet
containing $3 million (Sameeh 2015).

Some websites associated with terrorist organisations have also started to collect donations in
Bitcoins. An example of this is http://kavkazcenter.com (Combatting Terrorism Centre 2014).
However, this is likely to be small scale, compared to the other channels of funding discussed earlier.

In reality, it is unclear if Bitcoin is, or ever will be, a significant part of ISIS or other terrorist groups
fundraising efforts or method of fund movement. However, with the interest shown in leveraging
digital and crypto-currencies, it is likely that use of these mediums will only increase in the future.
What is important is that it demonstrates that terrorist organisations are trying to understand new

3
http://youtube.com/watch?feature=player_embedded&v=Um63OQz3bjo#!
http://bitcoinweekly.com/articles/how-bitcoin-security-works-by-analogy
4
The US Treasury Department estimates that ISIS generates between $468 million and $520 million annually.

3
 and evolving technologies that may be used to move funds to areas where and when they are
needed most in a relatively anonymous and safe manner.
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 2. Bitcoins and their links to criminal activity

Articles about the risks posed by Bitcoins and other crypto-currencies are never far from the
headlines. A number of high-profile investigations and prosecutions suggest that Bitcoins are
becoming the currency of choice for many criminals. There is clear evidence to suggest that
criminals have been using Bitcoins and other digital currencies for some time to facilitate their
criminal activity. They are being used to buy and sell illegal drugs (Martin 2014; Aldridge & Décary-
Hétu 2014) and Internet malware bots and spying tools (Paganini 2012) on online dark market sites.
They are also being used to launder funds through online games (Richet 2013).

Organisations such as the FBI and the Australian Crime Commission are investigating the misuse of
virtual currencies such as Bitcoins to facilitate criminal activity (Southurst 2014). The FBI considers
the anonymous Bitcoin payment network to be an ‘alarming haven for money laundering and other
criminal activity’ (Zetter 2012). As far back as 2012, the FBI were expressing concerns about the
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difficulty of tracking the identity of anonymous Bitcoin users and remonstrating how law
enforcement agencies were experiencing difficulty identifying suspicious users and obtaining records
for Bitcoin transactions (FBI 2012).

E. J. Fagan, the Deputy Communications Director at Global Financial Integrity, a research

organisation dedicated to studying illicit financial flows, argues that “the only people who really
need completely anonymous financial transactions are those involved in criminal activity”. This is
because “non-criminals could use cash to receive the same levels of anonymity” (Edwards 2013).
Criminals are cash rich and, due to the transnational nature of criminal enterprises, they must be
able to transfer funds across jurisdictional borders. However, if they use traditional financial system
to move funds these transactions and accounts become subject to AML/CTF laws and regulations.
Therefore, Bitcoins solves the banking problem for criminals insofar as it allows them to conduct
financial transactions without those transactions being subject to scrutiny. Anecdotal evidence
suggests that, using Bitcoins, it is possible for criminals to circumvent controls by enabling peer-to-
peer cash transactions on a large scale, thereby, allowing criminals to launder large amounts of
money anonymously.

3. What are Bitcoins and how do they work?

A crypto-currency is a means of exchange which uses principles of cryptography to secure

transactions and control the creation of new coins. The first crypto-currency, Bitcoin, was released
in January 2009 by Satoshi Nakamoto as a means of allowing users to trade amongst themselves in a
secure, low-cost and private fashion (Surowiecki 2011). These characteristics, along with the global
recession, caused by the subprime mortgage crisis and ensuing reduction in confidence in
government-issued currencies, resulted in an exponential rise in the creation and use of Bitcoins and
other similar crypto-currencies worldwide. Although these factors played an important role in the
rise of crypto-currencies, it should be noted that Bitcoins in particular have received an enormous
amount of attention due to the massive return on investment experienced by early adopters of the
technology.

In late 2013, only a few short years after the first Bitcoin was traded, Bitcoins were valued at
300,000 times5 their original trading price. However, since then, the price of Bitcoins has gone
through various cycles of appreciation and depreciation referred to by some as bubbles and busts
(Columbo 2013 and Moore 2013). In July 2015, there were 584 crypto-currencies in 1,774 markets
(Coinmarketcap.com 2015). This is a significant increase on the 349 crypto-currencies available in

5
The first Bitcoin exchange rate was published in October 2009 at 1USD for 1,309.03 BTC

5
 740 markets in June 2014 (Chuen 2015). It should be noted, however, that only 10 of 584 crypto-
currencies available have market capitalizations over $10 million (CoinMarketCap 2014). Bitcoin is
the most popular crypto-currency.

All crypto-currencies are maintained by a community of crypto-currency miners who are members of
the general public that have set up their computers or ASIC machines6 to participate in the validation
and processing of transactions. Most crypto-currencies are derived from one of two protocols:
proof-of-work (POW) or proof-of-stake (POS). In POW systems, the probability of mining a block is
dependent on how much work is done by the miner. In proof-of-stake systems, users can “mine”
depending on how many coins they hold. For example, a user owning 5% of a coin-base can mine 5%
of the blocks in the same way that a user owning 5% of the Bitcoin mining network can theoretically
mine 5% of the blocks (Graydon 2014).

Unlike centralized banking systems, where governments can control the value and availability of fiat
currency7, governments have no control over crypto-currencies – they are fully decentralized and
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fully independent. Most crypto-currencies are designed to decrease in production over time which
creates a cap on the market. For example, there will never be any more than 21 million Bitcoins in
circulation.

Obtaining Bitcoins is a relatively straightforward process (see Figure 1). Before Bitcoins can be
purchased, the purchaser must first create a Bitcoin wallet, download and install a Bitcoin desktop
client or obtain a hardware Bitcoin wallet. Each of these wallet types are used to store Bitcoins and
make transactions.

Getting an online Bitcoin wallet is the fastest and easiest way to purchase and store Bitcoins. A
Bitcoin wallet can be up and running in minutes. By setting up an online Bitcoin wallet, the holder of
the wallet is authorising a third party to receive and store Bitcoins on their behalf. The Bitcoin wallet
can create a new address for each transaction that the holder wishes to make. The identity of the
holder of any particular Bitcoin wallet or address remains totally anonymous, unless intentionally
disclosed. Bitcoin wallet providers offer differing levels of security and service, therefore, an illicit
user must obtain one that fits their particular security needs.

Bitcoin desktop clients provide high levels of security and control in storing and transferring Bitcoins.
Many Bitcoin clients are open source software (for Windows, Mac or Linux) and can be obtained free
of charge. There are a number of downsides of using a Bitcoin desktop client. Firstly, the entire
Bitcoin block chain must be downloaded8. This is involves transferring a huge amount of data and
may take over a week to download (longer for those with slower bandwidth/Internet speeds).
Secondly, if the user encrypts the Bitcoin client and cannot retrieve the passphrase the Bitcoins are
gone forever. Similarly, if the user does not securely backup the wallet onto another computer, flash
drive or CD and the wallet is lost or corrupted, the Bitcoins are lost forever.

Hardware Bitcoin wallets are devices that store part of a user’s wallet security in offline hardware.
The hardware wallets keep the users private keys safe and validate transactions. They provide a
very secure environment. With a hardware wallet, Bitcoins are safe, even on a compromised host.
Hardware wallets have major advantages over other types of wallet in that the keys are encrypted
and stored in a protected area of the microcontroller. This means that keys cannot be transferred

6
An ASIC is an application-specific integrated circuit, or chip, designed for the specific purpose of mining
Bitcoins. The system is incredibly powerful and extremely energy efficient.
7
Fiat currency is currency that a government has declared to be legal tender but is not backed by a physical commodity.
8
This contains the entire transaction history of Bitcoin.

6
 out of a device in plaintext. Another major advantage is that hardware wallets are not vulnerable to
the viruses that steal from software wallets.

Selling Bitcoins online is the most common way of trading Bitcoins. Bitcoins can be sold online in
three ways: direct-trade with another individual, with an intermediary facilitating the connection;
online exchange, where trade is with the exchange rather than an individual and peer-to-peer
trading marketplace, where Bitcoin owners obtain discounted goods with their Bitcoins via others
who wish to obtain the crypto-currency with their credit/debit cards.

On direct-trade sites, users typically have to register as a seller and verify their identity. Once
registered, the user can post an offer signalling that they want to sell Bitcoins. The site will notify
the seller when a buyer wishes to trade with them. Although the transaction or trade can be
completed through the website, the interaction is solely between the buyer and the seller.
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On exchange sites, users still have to verify their identity. However, the exchange site does most of
the work when it comes to organising the sale. The seller places a sell order, stating the amount and
type of currency they wish to sell and the price per unit they wish to receive for it. When the
exchange receives a matching buy order, it completes the transaction and the funds are deposited
into the seller’s account.

Using this model, the exchange site holds all of the funds in escrow9 until buy and sell orders can be
matched. If the seller wants to sell Bitcoins for fiat currency, they must withdraw those funds to a
bank account.

Sellers can use a crypto-currency-only exchange10 to change their Bitcoins into another form of
crypto-currency. However, this is likely to be an unpopular choice as the majority of crypto-
currency-only exchanges trade in Bitcoins only (CoinCompare.com 2014). Disadvantages of using
exchange sites is that if the exchange goes bankrupt or faces liquidity problems, it can be difficult, if
not impossible, for users to receive their funds back (Forbes.com 2014). Exchange sites charge
users a fee, ranging from 0.20% to 2%.

Another consideration that sellers must to take into account, when choosing an exchange site, is the
maximum amount of funds that they are allowed to store in their accounts. It is best practice,
however, for a seller (or buyer) not to store all their crypto- and fiat currencies in an exchange due
to well-documented security/hacking threats and potential liquidity/bankruptcy risks.

Many Bitcoin exchanges offer multiple payment methods, making purchasing Bitcoins very easy.
They accept all major credit cards, bank wire transfers, cashiers cheques, PayPal and BPay. Some
traders allow the exchange of Bitcoins to other virtual currencies. This can further obfuscate the
origin and recipient of funds when they have gone through this layering process.

On peer-to-peer trading marketplaces, service providers bring together individuals who want to
use Bitcoins to buy goods from sites which do not yet directly accept these or other forms of digital
currency and those who would like to buy Bitcoin with a credit or debit card. The marketplace brings
together individuals with matching requirements to effectively sell Bitcoin to one and provide
discounted goods to the other. The marketplace works by acting as an intermediary, offering users a
Bitcoin wallet and escrow service for transactions. Peer-to-peer trading marketplaces work as
follows (Coindesk 2015):

9
Escrow services reduce the risk of online fraud for both the buyer and seller. The escrow service collects, holds and
releases funds online, according to transaction terms agreed upon by the buyer and seller.
10
Do not exchange Bitcoins into fiat currency.

7
 1. Alice posts her required Amazon wish list on the marketplace, stating the discount she would
like to receive (normally up to 25%).
2. Bob has a credit/debit card and wants to buy Bitcoins matching the value of Alice's purchase(s).
He accepts the trade and, through the marketplace, buys the Amazon goods and requests they
be delivered to Alice's address.
3. Once the goods are delivered, Alice notifies the marketplace and Bob's Bitcoins are released
from escrow and arrive in his wallet, minus Alice's agreed discount and a small fee for the
marketplace.

The disadvantage of using this system is that Bob pays relatively high fees for the service. However,
he can easily acquire bitcoins via his bank card.

4. Transforming fiat currency to Bitcoins and Bitcoins to fiat currency

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For Bitcoins to be of value to a terrorist organisation, they must be able to convert fiat currency to
Bitcoins and back again anonymously. The easiest way to do this is to obtain Bitcoins using cash.
There are a number of ways that this can be achieved. For example, using a Bitcoin ATM machine,
face-to-face exchange with a known individual, face-to-face exchange using a third party website, or
using a third party service where the purchaser deposits cash directly into the company’s nominated
bank account and then the company deposits Bitcoins into the purchaser’s nominated Bitcoin wallet.
Sections 4.1 to 4.3 examine how funds can be transformed using each of these methods. Section 4.4
discusses how PayPal are starting to utilize Bitcoin payment processors through their payment hub
and section 4.5 briefly explores the anonymity of Bitcoins when combined with Dark Wallets or Tor
browser.

4.1 Bitcoin ATM machine

Bitcoin ATMs allow users to buy Bitcoins with cash. However, two-way ATMs, which are increasing
in popularity, allow users to buy and sell Bitcoins for cash. The process for purchasing and selling to
Bitcoin ATMs are shown in Figure 2 and Figure 3, respectively.

Using a Bitcoin ATM, a bad actor is able to very quickly and easily transfer funds anywhere in the
world with, in many cases, insufficient or ineffective levels of verification being carried out to
determine their money laundering or terrorism financing risk.

Of more concern, however, is the ability for bad actors to purchase their own Bitcoin ATM machines
in order to transfer large sums of money internationally. Purchasing and operating an ATM machine
is an extremely easy and relatively inexpensive process. Companies sell cash-to-Bitcoin ATMs for as
little as $6,500. These cash-to-Bitcoin ATMs accept any denomination and type of currency11.
ATMs can be upgraded to a Bitcoin-to-cash service for an additional $5,500. Using ATMs, substantial
amounts of fiat currency can be turned into Bitcoins and deposited into a Bitcoin wallet on the other
side of the world in as little as 15 seconds. If the country that the Bitcoins have been sent to has a
Bitcoin-to-cash ATM, the individual can cash-in their Bitcoins for the hosting nation’s fiat currency.
Some ATMs support leading exchanges, wallets and price feeds. Funds can be cashed out in several
denominations and allow a total of 1,000 notes to be cashed out at any one time (five hundred of
each denomination).

When someone wishes to use a Bitcoin ATM in the USA or Canada they must adequately identify
themselves. They can simply do this by scanning their driving license. Other forms of identification
can be used as systems can be hooked up to third party service databases to verify the identification
11
Euros, USD, AUD, GBP etc

8
 provided. However, these levels of verification may not be necessary when the ATM machines are
based in other countries.

Operating Bitcoin ATMs can also be an excellent source of revenue as there are no recurring
operational fees and profits can be made from operating the machines12. The first Bitcoin ATM was
opened in a coffee shop in Canada in October 2013. After 29 days of operation, it had transacted
one million Canadian dollars (Spaven 2013a). Although the number of Bitcoins ATM machines
available worldwide is currently still small, as the popularity of Bitcoins grows, these numbers will
certainly increase. Non-traditional money transfer systems such as Bitcoins are particularly
attractive to the large number of people who cannot or do not wish to use traditional financial
systems worldwide. This is undoubtedly the reason why one Bitcoin ATM dealer13 feels confident
that they can take 20% of the overall global ATM market14 within the next 10 years.

An important feature is that some Bitcoin ATMs can be operated independently; there is no need to
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use a third party service provider. This means that it is possible for anyone, including a terrorist
organisation, to obtain hundreds of Bitcoin ATMs place them in any country and use them as a way
of moving funds seamlessly from one jurisdiction to another. Since the owner of the ATM machine
is responsible for their own AML/CTF compliance controls and procedures, it is possible that the
terrorist organisation overlook transactions that they know to be suspicious. When purchasing a
Bitcoin ATM machine in the USA, operators must complete and sign a due diligence questionnaire
stating that they have not been convicted of a financial crime, theft, fraud, filed for bankruptcy or
been the subject of insolvency proceedings. They must also consent to a background check.
Operating a Bitcoin ATM machine in the USA may classify the operator as a money transmitter.
Therefore, the operator would be subject to registration as such and be required to comply with
AML/CTF regulations in that jurisdiction. Many countries have not yet classified those who operate
Bitcoin ATMs as money transmitters, therefore, they are not required to comply with AML/CTF
regulations.

Another significant risk is that at least one Bitcoin ATM supplier examined allows customers to
purchase ATM machines using Bitcoins as a method of payment. This makes it difficult to verify the
purchaser’s identity if they have taken steps to conceal it.

Although the total number of Bitcoin ATMs is still small (469 Bitcoin ATMs worldwide in October
2015), significant growth (85%) was seen between October 2014 and October 2015 (see Table 1 for a
breakdown of number of ATMs by geographic location). Approximately 58% of the ATMs allow
Bitcoins to be purchased with cash, with the remainder (42%) allowing both the buying and selling of
Bitcoins for cash. The majority of ATMs are located in North America (55%), Europe (29%), Asia
(10%) and Oceania (6%), with smaller numbers being located in South America and Africa (<1%
respectively). Many of the Bitcoin ATMs are located in countries that have seen significant numbers
of foreign fighters join ISIS in the Middle East (see Table 1). They are also positioned in countries
that have seen increased risk of terror attack such as Australia, Belgium, Canada, Denmark, Estonia,
France, Germany and Ireland. These ATMs presents a significant terrorism financing risk as they
allow for the seamless, anonymous transfer of funds to and from terrorist groups and their
supporters.

12
Dependant on the number and value of transactions.
13
Name of dealer withheld.
14
20% of the ATM market translates to 400,000 units. The ATM market refers to traditional ATM machines.

9
 4.2 Withdrawing cash from a Bitcoin wallet using a Bitcoin ATM15

On Bitcoin trading sites, buyers and sellers from different countries can exchange their local
currency for Bitcoins. Traders post notices on the site stating their desired exchange rate and
payment method for obtaining or selling Bitcoins. A buyer or seller responds to these notices and
agrees to meet the trader in person to buy or sell Bitcoins with cash. For example, one Sydney
trader prefers to meet Bitcoin sellers at his local coffee shop or fast food restaurant within 4 hours
of the deal being made. He prefers to pay cash for the Bitcoins but can deposit cash into the seller’s
bank account. The only information required to trade on one of these Bitcoin trading sites is a
username, an email address and a password. With face-to-face, cash transactions, buyers and
sellers are able to maintain high levels of anonymity.

4.3 Direct-deposit of cash into a third party service provider’s bank account in return for
Bitcoins
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Bitcoin exchanges allow customers to place buy or sell orders. When a buy order is placed, the
exchange sends the payment instructions to the customer’s email account. The customer then
physically goes to the exchange’s bank and deposits cash into their nominated account. After
receiving the deposit, the exchange credits the Bitcoins into the buyer’s Bitcoin wallet. The whole
process can take as little as one hour and the only information that is required by the exchange is
the buyer’s email address and mobile phone number. For those wishing to maintain high levels of
anonymity, it is a simple process to create an email account which requires no verification at setup.
It is also possible to obtain a throw away mobile telephone or use burner software on their mobile
telephone to generate temporary numbers to receive calls and text messages and then quickly
dispose of those numbers after the transaction has been completed.

To sell Bitcoins through an exchange, the customer must provide the exchange with their email
address, mobile telephone number and their bank details. It is likely, however, that a terrorist
organisation or terrorism financer would prefer to sell their Bitcoins through a face-to-face exchange
using a third party website rather than provide their bank account details as this would provide them
with higher levels of anonymity.

4.4 PayPal and Bitcoin

PayPal are actively seeking to help PayPal merchants accept Bitcoin payments. They have entered
into agreements with three leading Bitcoin payment processors to accept Bitcoins through their
PayPal Payments Hub (Protalinksi 2014). PayPal chose these payment processors because they
claim to have demonstrated good levels of security and have AML/CTF processes in place in the form
of KYC controls.

Bitcoin payments will only be available to merchants in North America. However, it is likely that the
service will be rolled-out to other countries quickly if no serious issues arise. Although, at this stage,
PayPal will only help merchants accept Bitcoin payments, they are not totally discounting the
possibility of adding Bitcoin as a currency in their digital wallet or processing Bitcoin payments on
their secure payment platform at some time in the future. They prefer to sit back and observe how
things develop in the future. Considering recent innovations and developments in the virtual
currency arena, it is not surprising that PayPal is dipping its toes in the virtual currency market.

15
Robocoin requires palm vein scanning, phone and PIN verification code, Bitcoinnect supports several
verification methods such as phone verification or finger scan. BitAccess supports mobile telephone number
verification.

10
 Although PayPal, like any transnational money service provider, needs to follow national and
international AML laws and regulations, it is extremely difficult for them to detect and prevent
terrorism financing. This is due to the small amounts of funds that can be involved in such activity.
PayPal and other money service providers should have anomaly detection systems in place which
signal transactions that are suspicious. However, it is entirely feasible that their anomaly detection
software will not pick up small, inconspicuous amounts that are hidden in the millions of
transactions that they process every day. In addition, even when AML/CTF controls are put in
place, it is extremely easy to circumvent these controls using fake and/or stolen identity details and
Internet Protocol (IP) anonymizing/cloaking tools such as Tor Browser.

If, at some time in the future, PayPal decides to add Bitcoin as a currency to their digital wallet or
process Bitcoin payments for all types of online merchant, terrorists may be able transfer funds and
obtain services and products with little chance of detection.
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5. Anonymity of Bitcoins

Although the Bitcoin blockchain16 records all of the transactions conducted, the Bitcoin structure
actually facilitates anonymity due to the absence of personally identifiable information (PII) which
links sellers and buyers to actual transactions. It also achieves anonymity through the use of public
and private key pairs. So, while the transactions themselves are not hidden, the individuals engaged
in those transactions are largely anonymous.

Although Bitcoin users do not provide PII, they are not completely anonymous. Bitcoin users can
and have been tracked by careful analysis and examination of transactions. Primarily by analysing
the repeated use of specific public keys associated with payments.

Once the transactions associated with specific public keys have been identified, software can be
used to construct a pattern of behaviour based on those transactions. For example: software can
map user transactions across the network, analyse the repeated use of specific public keys and pair
transactions across datasets to find individual network users. In so doing, a picture of where
individuals shopped, how much they spent and the frequency of transactions can be developed.
They may also be linked to third party transactions where personally identifiable information was
collected by those third parties.

While careful analysis can uncover those that use multiple sets of public keys to complete
transactions, new services such as Dark Wallet and Bitcoin Fog propose to enhance the anonymity of
transactions by allowing illicit transactions to digitally “piggyback” on non-illicit transactions – this is
similar to the mingling of funds that is common in money laundering. This creates a single
transaction that obfuscates both legitimate and illegitimate coins. By mixing bundles of Bitcoin
transactions together and simultaneously sending them to new Bitcoin addresses, which are also
controlled by the same users, anyone watching the transactions cannot see whose coins went
where. This technique erases any ownership-identifying traces on the coins. It is feared that Dark
Wallet services combined with a Tor Browser may allow Bitcoins to be transferred with complete
anonymity.

16
The Bitcoin blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is
constantly growing as 'completed' blocks are added to it with a new set of recordings. The blocks are added to
the blockchain in a linear, chronological order.

11
 6. Current research

A number of organisations have already started to look into the risks posed by Bitcoins and other
digital currencies. For example, in 2012 the Australian Crime Commission hosted a multi-agency
workshop, looking at the emerging threats posed by criminal use of anonymous online payments
systems, including Bitcoin. The Australian Crime Commission has also undertaken a number of
research projects (Longstrike, Rumpere and Lumberjack) to gain a better understanding of how
criminals may exploit virtual currencies. The FBI looked into the dangers of Bitcoin for terrorism
financing and concluded that they could theoretically be used by countries such as Iran to transfer
large amounts of cash to groups such as Hamas (Spaven 2013b). An FBI report entitled “Bitcoin
Virtual Currency: Intelligence. Unique Features Present Distinct Challenges for Deterring Illicit
Activity”, published in 2012, revealed that they were concerned that Bitcoins could become a
payment method for cyber criminals in the near future, and could be used to fund “illicit groups”
(FBI 2012).
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Although there is a clear consensus of opinion that cryptocurrencies and some digital currencies
pose a significant money laundering and terrorism financing threat, there are a number of questions
that must be answered before an accurate picture of the risks associated with this emerging and
potentially revolutionary technology can be obtained. These can be broken down into five broad
areas: transactions, anonymity, feasibility, legislation and technology. Although, legislation and
technology are extremely important issues in understanding the risks associated with Bitcoins, the
research discussed here focuses on issues related to identifying illicit transactions (see section 6.1),
anonymity of Bitcoins (see section 6.2) and the feasibility of using Bitcoin over traditional terrorism
financing methods (see section 6.3).

6.1 Defining illicit transactions

The funds associated with international terror attacks can be small and innocuous. For example, the
9/11 attacks in the USA are believed to have cost between $400,000 and $500,000 (National
Commission on Terrorist Attacks Upon the United States 2004), the 2002 Bali bombings cost
approximately $50,000 (Prober 2005), the 2003 Jakarta hotel bombing cost approximately $30,000
(Prober 2005), the 2004 Madrid train bombings cost approximately $10,000 (Prober 2005) and the
2005 London transport system attacks cost approximately $14,000 (Temple-Raston 2014).
Similarly, components used to conduct attacks can be obtained for as little as a few hundred dollars.
For example, remote control bombs can be obtained for $400 each and suicide bombing vests costs
$1,200 each. At current exchange rates17, the funds associated with the attacks on the World Trade
Centre and the London Transport system attacks would require only 1,446 Bitcoins and 78 Bitcoins
respectively. It would be extremely easy to hide these Bitcoins inside the hundreds of thousands of
transactions that take place through the Bitcoin blockchain each day. It is impossible for law
enforcement and intelligence agencies to examine every single transaction that occurs through the
blockchain, therefore, there needs to be some type of risk analysis conducted to determine which
transactions may be suspicious.

For a number of years, financial institutions have successfully used red flag indicators and suspicious
behaviour models to detect money laundering and terrorism financing activity conducted through
their banking systems. However, it is unlikely that similar behaviour models or red flag indicators
exist for detecting illicit transactions travelling through the Bitcoin blockchain.

17
On 23rd October 2015, 1 Bitcoin could be obtained for 276.65 US Dollar

12
 In the early stages of research, a document, reported to be published by ISIS, was found which
provided detailed instructions on how would-be jihadists could get to Syria without detection.
Using the recommended routes and methods advised by ISIS, a scenario of how this could be funded
and carried out using Bitcoins alone was developed18. From this scenario, red flag indicators and
suspicious behaviour models were created in order to determine whether the scenario, red flag
indicators or suspicious behaviours could be identified in the Bitcoin blockchain. The scenario, red
flag indicators and suspicious behaviour models will be used when analysing the blockchain.

Analysis of the Bitcoin blockchain will also try to establish: If it can be determined how terrorist
groups and their supporters move their funds, can similar patterns be found on the Bitcoin
blockchain? Can patterns be found in transactions, even when they are being deliberately
obfuscated? Can the beginning and endpoint of transactions be traced by linking them in some way
to fiat currency at the start or end of the conversion process? Can the beginning and endpoint of
transactions be determined by linking them to legal tender or a physical commodity? Can evidence
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be found of suspicious transactions going into and out of high risk regions?

6.2 Anonymity

It is extremely difficult to accurately identify the sender and receiver of funds that are transferred
through the Bitcoin system but are there any areas or conditions where anonymity may be lost, even
when Dark Wallet and Tor technologies are being used? Are there any points in the journey
between cash to digital, back to cash again that anonymity might be lost? Although layering funds
through traditional financial systems may confuse or obfuscate the money trail, does layering
actually provide an avenue of detection for those who have used Dark Wallet, Tor browsers, wallet
and exchange services, online retailers or other intermediaries? Are there any weak links in the
chain? These questions will be answered through a series of experiments and through analysis of
the Bitcoin blockchain. Bitcoin transactions will also be conducted through various types of service
then captured and analysed via Wireshark packet capture software to determine whether any useful
information can be found to assist in identifying those who conduct transactions.

6.3 Feasibility

Although Bitcoins appear to be an excellent conduit for transferring funds to and from terror groups,
analysis of the feasibility of using Bitcoins over traditional methods is required. What advantages
and disadvantages do Bitcoins provide to terrorist groups in terms of ease of use, speed of
transaction, cost, chances of detection and risks mitigated? Although there is some evidence to
suggest that terror groups are interested in and may be starting to use Bitcoins, what would need to
happen for these organisations to use Bitcoins and other digital currencies on a large scale?

Part of any feasibility study would be determining how easy or difficult it would be to convert
Bitcoins to cash in high risk countries such as Afghanistan, Iran, Iraq, Pakistan, Sudan and Syria?
Although these countries are likely to benefit from the advantages of Bitcoin technology, they may
have the weakest infrastructure for getting funds converted from Bitcoins to cash or from cash to
Bitcoin. Do they have the necessary infrastructure for successfully using this technology?

These questions will be answered through a combination of open source literature review, review of
Bitcoin service providers and their verification procedures, review of information collected from
Bitcoin service providers and online retailers who accept Bitcoin as payment methods. The Bitcoin
blockchain will also be analysed using packet analysis software to determine whether reliable and
consistent information can be gained on the users of these payment systems.
18
These models can be provided to the law enforcement community upon request.

13
 7. Conclusions

Bitcoins provide a number of obvious benefits for bad actors. Terrorist groups and their supporters
are starting to explore and understand the value that these technologies may have in increasing
operational efficiency and security. Therefore, it is essential that steps are taken now to understand
potential areas of weakness in this technology before it, and others like it, become mainstream
methods of transferring illicit funds around the world. Failing to respond now may be a recipe for
disaster.

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 Number of foreign fighters
Country Number of ATMs per million population
USA 166 1
Canada 86 2
United Kingdom 25 12
Australia 23 13
Spain 20 2
Hong Kong 12 0
Japan 11 0
Czech Republic 10 0
Switzerland 10 0
Finland 10 13
Netherlands 9 15
Italy 9 2
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Slovenia
China
Macau, Austria, Mexico
Indonesia, Denmark, Poland, France,
South Korea, Israel, Belgium, Romania
Bulgaria, Hungary, Singapore, Thailand,
Ireland, Sweden, Philippines
New Zealand, Saudi Arabia, Estonia, Panama,
Greece, Paraguay, Germany, Jersey,
South Africa, Slovakia, Kyrgyzstan, Argentina,
Croatia, Serbia, Isle of Man, Portugal
6 0
5 0
4 0, 17, 0
3 *, 27, 0, 18
0, 0, 40, 0
2 0, 0, *, *
7, 32, *
1 1, 107, 1, 0
0, 0, 8, 0
0, 0, 5, 0
0, 1, 0, 0

Table 1: Number of Bitcoin ATMs (Source: Coin ATM Radar, 19 October 2015) and number of foreign
fighters per million population by country (Sources: French Interior Ministry, British Government,
Belgian Government, Austrian Interior Ministry, US Government, Australian Government, The
International Centre for the Study of Radicalisation and Political Violence, Reuters, France24,
Deutsche Welle, The Local Sweden, Sveriges Radio, 29th January 2015)
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Figure 1: How to obtain Bitcoins using a Bitcoin wallet

 The user opens the QR10 code
associated with their Bitcoin
wallet on a smartphone.

The user runs the QR code

under the bitcoin ATM
machine’s scanner.

The user enters the amount

of cash to be exchanged for
Bitcoins.
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The ATM processes the

transaction and credits the
Bitcoins to the users account.

The ATM confirms that the

transaction has been
processed.

Figure 2: Purchasing Bitcoins for Bitcoin ATM

 User signs into the ATM (this is the
verification step which differs depending
on ATM operator or ATM type11)

User taps the “withdraw” button

User chooses the amount of cash they

want to withdraw and clicks “finish”
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button.

The ATM dispenses cash and prints out a

receipt.

Figure 3: Withdrawing cash from a Bitcoin wallet using a Bitcoin ATM1

1
Robocoin requires palm vein scanning, phone and PIN verification code, Bitcoinnect supports several
verification methods such as phone verification or finger scan. BitAccess supports mobile telephone number
verification.