Indian Defence Review

There are various segments of customers who may be interested in buying and selling Bitcoins. It ranges from traders to freelancers to online web market spenders to Hackers. The Bitcoin address to which you shall send Bitcoin may be of the guy next door or across the globe. It is similar to sending an email to an email address. The recipient backgrounds of Bitcoins are not verified, hence, it can be sent to anyone. As the cost of transferring value through Bitcoins is cheaper compared to the Telegraphic Transfers (TT) sent through banking channels, Bitcoins are catching up with the tech savvy younger generation.

In recent years, virtual currencies like Bitcoin has emerged as one of the attractive payment mechanisms which provide new methods for transmitting value over the internet. However, notwithstanding the financial creativity, there has been an acknowledgement in the international community about the money laundering and terrorism financing risks associated with the abuse of virtual currencies like Bitcoin. Though, there has been considerable inquest into virtual currencies and its links to terrorism financing, law enforcement agencies and regulatory bodies have been able to find evidentiary trail linking virtual currencies like Bitcoin with criminal syndicates and not on terrorism financing aspect.

With the birth of technology savvy terrorist groups such as the Islamic State, virtual currencies have found traction among such groups. Latest updates have indicated that Bitcoin route has been abused by some of the operatives linked to various groups in Syria such as the Islamic State and the Hayat Tahrir al-Sham (HTS).

These developments place an imperative on the financial sentinels on the need to identify methods which are used for terrorism financing. More so, in countries like in India, the risk of terrorism financing through virtual currencies such as the Bitcoins can be very high given India’s lack of regulation with a concomitant surge in the technical capability of various terror groups operating from Pakistan and elsewhere.

Bitcoin

Bitcoin1 is a cryptographic, digital introduced in the digital world in 2008 on an experimentation basis. It is referred to as a “peer-to-peer, electronic payment system”. It is not a physical currency but is in virtual form and can be used to make payments online.

Technically, Bitcoin is an extract of codes based on algorithm, founded by a person named with a pseudo name Satoshi Nakamoto. The creation and transfer of Bitcoin is based on open source cryptographic protocol managed in a decentralised manner. Bitcoin network shares a public ledger called the “Block Chain”.

These Bitcoins are traded like physical currencies in stock exchanges like BTC China, Mt. Gox in Japan, BitBox in U.S., Bitstamp in Slovenia and Bitcurex in Poland. Essentially, Bitcoins have become a trading medium in the virtual world. The Bitcoins are stored in digital wallets.

There are various segments of customers who may be interested in buying and selling Bitcoins. It ranges from traders to freelancers to online web market spenders to Hackers.

The Bitcoin address to which you shall send Bitcoin may be of the guy next door or across the globe. It is similar to sending an email to an email address. The recipient backgrounds of Bitcoins are not verified, hence, it can be sent to anyone. As the cost of transferring value through Bitcoins is cheaper compared to the Telegraphic Transfers (TT) sent through banking channels, Bitcoins are catching up with the tech savvy younger generation.

Bitcoin and Terrorism Financing – Dangerous and Diabolic

Studies commissioned by law enforcement and regulatory bodies have identified virtual currencies as one which offers great potential for criminal networks. A 2016 Europol report entitled Internet Organised Crime Threat Assessment states that “virtual currencies such as Ethereum and Bitcoins show potential for criminal use. It further adds, “Cryptocurrencies, specifically Bitcoin, remain the currency of choice for much of cybercrime, whether it is used as payment for criminal services or for receiving payments from extortion victims”.

While, some institutions have acknowledged the risk posed by virtual currencies like Bitcoins, others have merely vectored their focus on crime and virtual currency nexus. A report by Europol in January 2016 entitled “Changes in modus operandi of Islamic State terrorist attacks” states that “Despite third party reporting suggesting the use of anonymous currencies like Bitcoin by terrorists to finance their activities, this has not been confirmed by law enforcement”.

Another report entitled “Update on Virtual Currencies” released in February 2017, by the Financial Action Task Force (FATF), has acknowledged that virtual currencies space can be abused by terrorists financiers among others.

Another recent report by United Kingdom Treasury Office has assessed the use of digital currencies such as Bitcoins poses a low risk for terrorism financing. The report entitled National risk assessment of money laundering and terrorist financing 2017, states “While digital currencies could in theory be used to facilitate and finance terrorist activity, the lack of evidence of this occurring and the greater attractiveness of other methods mean that digital currencies continue to be assessed as low risk for terrorist financing”.

Terrorist Groups Are One Step Ahead

Contrary to what was believed till now, there are already ominous signs of terrorists groups using Bitcoins to fund their operations.

Groups operating out of Syria like the Islamic State technically proficient and highly computer literate. They have been using personal messenger applications such as the Telegram and Baaz for propaganda and for seeking finances. However, some of the Telegrams account linked to terror groups have been circulating images of fighting in the Syria and have been soliciting funds from prospective donors, providing Bitcoin address which has not been seen before.

The above Telegram Channel linked to one of the groups operating in Syria has sought funds to build trenches, sleeping areas, tunnels and provide weapons for the fighters in the frontline. This particular Telegram Channel explicitly states “Donate now anonymously with Bitcoin for providing Mujahideen with weapons, financial aid and other projects relating to Jihad” (sic). Social media forums such as Telegrams, Baaz and WhatsApp give these groups greater reach as these channels break down the barriers to communication which hinders traditional communication medium.

Indian Scenario

As of now Bitcoins are both neither legal nor illegal in India, Bitcoin offers anonymity in grey area. However, Bitcoin is not regulated in India. There is no regulatory body including Reserve Bank of India (RBI) in India which regulates Bitcoins yet.2 Additionally, the transfers are not monitored by dealers of Bitcoin nor by any of the financial regulators.

As the Bitcoin is not regulated by any authority in India, any transfers of Bitcoins out of the country are not a violation of Foreign Exchange Management Act (FEMA) or Prevention of Money Laundering Act (PMLA), 2002.

The possible scenarios for the Inward transfer of Bitcoins into a country by a terrorist group need to be explored, considered and acted upon.

• Know Your Customer (KYC) document is NOT mandatory for opening a Bitcoin account. A cell member of terror group in India can open a Bitcoin account with a Bitcoin dealer in India with a PAN card, which may not be a fool proof document.
• The handler outside India could send funds converted into Bitcoins received into the Bitcoin account of a cell member in India.
• The cell member could convert the same into Indian currency which is paid into bank account of the cell member.
• The banker is not suspicious as the funds transfer is from the local account of the Bitcoin dealer after conversion.

Bitcoins are quite attractive for terrorist groups in India as it offers them identity protection. Considering the reduced operational cost incurred to conduct terror attacks in India, transfer via Bitcoin route may assume importance for the operational modules within India. Given the rigid monitoring of formal banking and money transfer agencies due to FATF measures and domestic protocols in India, Bitcoin is bound to be attractive for various types of groups.

Large Transnational Groups – Bitcoins may be particularly attractive to groups like the Islamic State which has a huge social media presence Factoring in the recent spurt in the Islamic State activities across the globe due to its setbacks in Sham (Syria) and Khorasan (Afghanistan). Islamic State is on the lookout to expand its footprint into other greener pastures. Islamic State inspired modules or those which are connected to the Islamic State could encourage attacks in India eventually funding them through Bitcoins.

Bitcoins could also be attractive to other groups such as Lashkar-e-Toiba has also ramped up their social media presence in Pakistan and elsewhere. Newly sprouted groups such as Ansar Ghazwat Ul Hind headed by Zakir Musa is highly active in Telegram channels for running their propaganda.

Smaller Groups / Dark Networks / Grassroots cells/Individuals- Modules such as ones which were recently busted terror cells in India linked or inspired by the Islamic State, are small and self-contained. Modules such as these may find it attractive to raise funds within a small community or network of people. It would be particularly attractive to dark networks or grassroots terror cells which are autonomous, self-driven. It could also be attractive to individual persons who want to perform Hijrah (migration to Syria and Afghanistan).They might also find this route to be useful to receive money from potential donors without leaving any financial traces.

India to be Proactive or reactive?

Because of anonymity and speed, Bitcoin has the potential to be used by terrorist groups and organised criminal gangs. The checks and balances which are applied in banking system for an international transfer are not applied here. For instance, for receiving an inward TT for an export transaction, the exporter has to provide the purpose of payments including documentation like invoice, Guaranteed Remittance (GR) forms /Statutory Declaration Forms (SDF) etc., which acts as a check whether the payment is received against an actual legitimate export.

From India’s point of view, Bitcoins as a terrorism financing threat appears looming. As per latest reports, one Bitcoin equals USD 7287 (as on 03 November 2017). So, a transfer of one single Bitcoin into India will provide the terrorist groups with an operational sum of Rs. 4.5 lakh which is the usual operational cost incurred to conduct terror attacks in India on earlier occasions by the Indian Mujahideen and the Lashkar-e-Toiba. Bitcoin offers complete anonymity for the sender as well as the receiver which is why this has been favoured by even organised crime syndicates in India.

In 2015, an organised criminal group transferred 30 lakhs in 3 months from Mumbai to Dubai which was proceeds of an ATM fraud in India. As Bitcoins are not regulated in India the source of money sent is not questioned, anybody can fund their account and convert the same into Bitcoins by paying a local dealer. The bankers will not get suspicious as they will not realise that the actual funds which move out of the account, are being converted into Bitcoins as the funds will be transferred locally to a dealer.

To begin with, Bitcoin dealers have to be enumerated, listed and monitored. Concurrently, Bitcoins have to be brought under the PMLA ambit, which would make reporting obligations of Bitcoin transactions mandatory. Superficial measures such as issuing notices and circulars alone may not be sufficient to address this concern.

According to recent open source reports, there has been a proposal from the Indian Government to make Securities and Exchange Board of India (SEBI) to monitor and regulate Bitcoin transactions in India. One does not know how far SEBI would be successful, as Ministries of External Affairs, Home, Finance and Commerce and Trade and other institutions like RBI, IT etc., have to be included in meaningful regulatory scheme. Given Bitcoin’s close resemblance of character and propinquity with that of a monetary unit, it would only be prudent that Bitcoin is regulated in India like other financial instruments and more preferably by an institution such as the Reserve Bank of India.

At global level, from a terrorism financing point of view, too much of focus has been given to the Bitcoin while other lesser known virtual currencies such as Ethereum, Ripple,Litecoin, Onero are equally vulnerable for exploitation. As groups become more and more technology savvy, the risk of technological platforms being misused by terrorists groups is growing. Incidentally, the threat of terrorism financing through Bitcoins and virtual currencies is directly proportional to a terrorist group’s ability to harness the advantages of the virtual currency concept and technology

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As such, the trajectory of growth in the technological abilities of some groups like the Islamic State has been phenomenal and evolving so is the threat directly emanating from these abilities. This requires a concentrated and focussed approach from the Indian policy planners as well as cooperation and coordination by other States across the globe and international bodies such as the FATF to adopt uniform measures across jurisdictions to counter this threat.

Notes

1. Bitcoin has been chosen from among various virtual currencies such as Ethereum, Ripple,Litecoin, Onero. The term “Bitcoin” is used interchangeably to reference throughout this paper as it is still the most dominant virtual currency with 50% market share.
2. The Reserve Bank of India has in reply to a RTI query in 2016 has stated that it does not regulate the usage of Bitcoins nor does it have any details about number of Bitcoin dealers in India.