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Effects of FinCEN convertible virtual currency mixing seen first in UAE

Effects of FinCEN convertible virtual currency mixing seen first in UAE

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TL;DR

  • FinCEN (U.S Department of the Treasury’s Financial Crimes enforcement network) proposed new regulations to enhance the transparency in convertible virtual currency (CVC) mixing and combat Terrorist Financing
  • Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson announced that he would be travelling to Riyadh, Saudi Arabia and Doha, Qatar from October 23-26, 2023
  • UAE issues virtual asset service provider guidance announcement  on November 6th 2023 dealing with unlicensed virtual asset service providers and consequences

At the onslaught of the Israel Gaza war, the eyes of the world turned to Hamas and it’s financing. On October 19th FinCEN (U.S Department of the Treasury’s Financial Crimes enforcement network) proposed new regulations to enhance the transparency in convertible virtual currency (CVC) mixing and combat Terrorist Financing, mentioning Hamas, Palestinian Islamic Jihad. This was followed by a visit to the GCC region with meetings in KSA, UAE, Qatar and Bahrain, culminating in UAE NAMLCFT, the antimoney laundering branch of UAE Central Bank, recent guidance on unlicensed virtual asset service providers.

The FinCEN new regulation dubbed “CVC mixing offers a critical service that allows players in the ransom ware ecosystem, rogue state actors, and other criminals to fund their unlawful activities and obfuscate the flow of ill-gotten gains,” said FinCEN Director Andrea Gacki. He adds, “This is FinCEN’s first ever use of the Section 311 authority to target a class of transactions of primary money laundering concern, and, just as with our efforts in the traditional financial system, Treasury will work to identify and root out the illicit use and abuse of the CVC ecosystem.”

This regulation came out after Wall Street Journal published an article titled “Hamas Militants behind Israel Attack Raised Millions in Crypto” which noted that the Palestinian organization and their allies, got around $41 million worth of crypto donations between August 2021 and June 2023. The Palestinian Islamic Jihad, on the other hand, reportedly received approximately $93 million in crypto at around the same time.

In an October 17 letter to the White House and U.S. Department of the Treasury, over a hundred US lawmakers cited WSJ  report when stating that Hamas and Palestinian Islamic Jihad (PIJ) raised millions of dollars in crypto, evading US sanctions and funding their operations noting they raised over $130 million in crypto.”

Crypto and Anti-terrorism

The U.S. and other countries have been combatting crypto use in terrorism for some time. In August 2020, the US Department of Justice carried out an operation that led to the largest seizure of terrorists’ ryptocurrency account ever dismantling of three different “cyber-enabled” terror finance campaigns by Hamas’ Qassam Brigades, al-Qaeda, and Islamic State. Three years later, Hamas announced in April 2023that it would no longer accept donations via Bitcoin in an effort to evade detection by new technologies used to track illicit financing streams.

Fast forward to the events following October 7th, Israeli authorities announced it froze over 100 suspicious Binance accounts and seized millions in crypto coins.

Is crypto the real culprit?

Blockchain crypto analytic firms have stated in reports that there is no evidence to suggest that crypto fundraising is anything close to the amount suggested in Wall Street Journal article or in general when it comes to terrorist financing.

In an Elliptic blog statement the firm explains, We have spoken to representatives of the lead signatory, Senator Warren, as well as the authors of the Wall Street Journal article, to clarify this. In July this year, the NBCTF issued a seizure order for crypto wallets linked to Palestinian Islamic Jihad (PIJ), a terrorist organization active in the Gaza Strip. Elliptic analysis of the wallets seized by the NBCTF shows that these wallets received transactions totaling just over $93 million between 2020 and 2023. As we made clear in our research, in no way does this mean that PIJ had “raised” all of these funds or that they even all belonged to PIJ. It is not known what proportion of the funds received by those wallets is directly attributable to PIJ or other terrorist groups. It is likely that some of the wallets listed by the NBCTF belonged to small service providers such as brokers that were used by PIJ.”

Elliptic went on to say, “Terrorist groups do make use of crypto assets for public fundraising, but the amounts involved are tiny relative to other funding sources. Careful and detailed understanding of blockchain analysis is needed whenever approaching a nuanced and sensitive topic such as this, and the full context of any analysis should be provided by those using these insights.”

Even U.S. blockchain analysis firm Chainalysis downplayed crypto’ s role in terrorism financing, noting that it comprises “a very small portion” of “cryptocurrency transaction volume that is illicit.” In its blog, it noted, “Correcting the Record: Inaccurate Methodologies for Estimating Cryptocurrency’ s Role in Terrorism Financing,” noting that the reports might have overblown metrics and used “flawed analyses.”

The blockchain analysis firm confirmed that while ” Hamas, Hezbollah, and the Palestinian Islamic Jihad are leveraging cryptocurrency  and 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, it emphasized that terrorism financing is a very small portion of the  cryptocurrency transaction volume that is illicit.

Chainalysis explained that the “recent estimates” include funds not at all related to terrorism financing. “To the untrained eye, it might appear that $82 million worth of cryptocurrency was raised for terror financing,” Chainalysis said in the blog, adding, “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.”

Of the estimate, of the $82 million reported by the Wall Street Journal, only “about $450,000 worth of funds” were moved from a “terror-affiliated wallet” and noted that “it would be incorrect to assume all of the transaction activity … is related to terrorism.”

Finally according to a RAND corporation study of terrorist use of cryptocurrencies concluded that “current concerns about cryptocurrency as a significant enabler of terrorist groups are almost certainly overblown, but coming improvements in cryptocurrency technologies will likely have a significant long-term effect on CTF.”

Yet this did not have any effect on the FinCEN (U.S Department of the Treasury’s Financial Crimes enforcement network) proposed new regulations leading to multiple visits and meetings in the GCC region including countries such as KSA, UAE, Qatar, Bahrain and KSA.

FinCEN visit in KSA

CNN noted that the United States along with some Middle Eastern nations are stepping up efforts to target a “secret” Hamas investment portfolio government officials believe to be worth up to $1 billion. To target the Hamas investment portfolio, a US official noted the Treasury Department is working with members of the Gulf Cooperation Council: Saudi Arabia, Qatar, Kuwait, Oman, Bahrain and the United Arab Emirates.

In the CNN article, ‘They’re opportunistic and adaptive’: How Hamas is using cryptocurrency to raise funds. Treasury has said the global portfolio of investments includes companies operating “under the guise of legitimate businesses” in Sudan, Algeria, Turkey, the United Arab Emirates and other nations.

On October 22nd 2023, Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson announced that he would be travelling to Riyadh, Saudi Arabia and Doha, Qatar from October 23-26, 2023 to further U.S. efforts to deny Hamas and other terrorist organizations the ability to raise and move funds for their violent acts.

As per the press release, in Saudi Arabia, Under Secretary Brian Nelson co-chaired a meeting of the Executive Committee of the Terrorist Financing Targeting Center (TFTC), a multilateral body created to strengthen cooperation among seven countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, and the United States, to disrupt terrorist financing networks. This meeting which was supposed to be held on November 1st 2023 was moved forward.

The press release went on to note that FinCEN proposed new regulation to enhance transparency in convertible virtual currency and combat terrorist financing with Treasury in close contact with partners and allies at all levels to discuss efforts on countering terrorist financing.

FinCEN and Qatar

On October 25th 2023, Qatar’s HE Attorney-General Dr. Issa bin Saad Al Jafali Al Nuaimi met with under Secretary of the Treasury for Terrorism and Financial Intelligence of the United States Brian Nelson. As per news reports, they discussed topics of common concern between the State of Qatar and the United States of America in counterterrorism and money laundering and enhancing cooperation and coordination in that regard.”

In addition, Governor of Qatar Central Bank, H E Sheikh Bandar bin Mohammed bin Saoud Al Thani also met with Brian Nelson. During the meeting, they reviewed the bilateral relations in banking and finance and the means of consolidating them, and the Governor of Qatar Central Bank affirmed the State of Qatar’s firm and ongoing commitment to combating money laundering and the financing of terrorism in all its aspects. He also expressed that the State of Qatar will continue to cooperate closely and exchange experiences with the United States in this field.

FinCEN and Bahrain

On October 30th The under Secretary for Terrorism and Financial Intelligence also spoke with Bahraini Ambassador to the United States Nancy Abdullah Jamal, who also serves as a representative to the Executive Committee of the Terrorist Financing Target Center (TFTC), to discuss collaboration through the TFTC to disrupt terrorist financial networks. Under Secretary Nelson also emphasized US commitment to working with the TFTC to prevent regional actors from exploiting the ongoing war in Gaza. 

FinCEN and UAE

Then on October 31, Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson met with His Excellency Saeed Mubarak Al Hajeri, Assistant Minister for Trade and Economic Affairs of the United Arab Emirates (UAE).

Under Secretary Nelson and Assistant Minister Al Hajeri discussed the importance of continued collaboration on international sanctions and export controls, as well as countering the financing of terrorist groups and destabilizing actors across the region, while also ensuring the continued flow of humanitarian aid to the people of Gaza.

Under Secretary Nelson stressed the importance of Treasury’s partnership with the UAE through bilateral and multilateral mechanisms, such as the Terrorist Financing Targeting Center. The officials also discussed the UAE’s significant progress in addressing vulnerabilities in their anti-money laundering and counter-terrorist financing (AML/CFT) regime.

The visit corresponded to The U.S. Treasury Department’s Office of Foreign Assets Control sanctioning of a Russian national suspected of laundering money for wealthy Russians and for ransomware groups. The department said Zhdanova was contacted by a Russian oligarch who wanted her assistance in moving $100 million worth of assets to the United Arab Emirates. Zhdanova is also alleged to have helped Russian clients obtain UAE residency permits and bank accounts that would allow them to manage their finances globally without the restrictions of sanctions on Russia.

Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said, “Through key facilitators like Zhdanova, Russian elites, ransom ware groups, and other illicit actors sought to evade U.S. and international sanctions, particularly through the abuse of virtual currency.”

The Culmination of these Visits

The culmination of U.S. Treasury Department’s Under Secretary of the Treasury for Terrorism and Financial Intelligence can we be witnessed in the guidance announcement made on November 6th 2023 by UAE’s National Anti-Money Laundering and Combating Financing of Terrorism and Financing of Illegal Organizations Committee (NAMLCFTC), in collaboration with UAE supervisors, which aims to combat the use of unlicensed virtual asset service providers, by educating licensed financial institutions (LFIs) and the wider public sector on the risks associated with unlicensed virtual asset service providers.

As per the press release, the guidance has been issued pursuant to the Decree Federal Law No. (20) of 2018 on Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) and Illegal Organizations, and is in alignment with the Financial Action Task Force (FATF) publication on updated guidance for a risk-based approach to virtual assets and virtual asset service providers.

The guidance provides reporting entities including LFIs, Designated Non-Financial Businesses and Professions (DNFBPs), and Licensed Virtual Asset Service Providers (VASPs) with a comprehensive roadmap to enhance their governance and operational processes. It also highlights how to identify and address governance challenges and emerging risks, underlining the importance of compliance with regulatory obligations under AML legislation and the regulations, instructions, guidelines, notices, and rules issued by the Supervisory Authorities.

It specifically requires them to remain vigilant of the various fraudulent methods unlicensed VASPs adopt; continue to manage money laundering, financing of terrorism, and proliferation financing risks effectively; ensure emerging risks are factored into their business and customer risk assessments; and ensure due diligence is conducted to identify instances of forged documents and sanctions evasion.

Most importantly the guidance reminds the financial sector that VASPs operating in the UAE without a valid license will be subject to civil and criminal penalties including, but not limited to, financial sanctions against the entity, owners, and senior managers.

Even reporting entities that demonstrate willful blindness in their dealings with unlicensed VASPs and have weak AML/CFT and Counter Proliferation Financing controls may be subject to enforcement action.

Conclusions

While this is could be seen as the first effect of FinCEN’s efforts in the GCC region to combat to enhance the transparency in convertible virtual currency (CVC) mixing and combat Terrorist Financing, it seems we might be witnessing more such announcements from other Gulf countries including Bahrain, Qatar and KSA in the coming days, weeks or months.

How this will affect the crypto ecosystem in the UAE, Bahrain, and the recent incorporation of digital assets in Qatar, one will just have to wait and see.

 The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Lara Abdul Malak

Lara Abdul Malak is a seasoned tech journalist who got interested in blockchain after interviewing Vitalik Buterin in 2014. She is focused on the blockchain ecosytem in the MENA region. She owns Ethereum.

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