Updated: Feb 2, 2022
From hawala to the Fintech innovation
(by Davide Lauretta)
“Follow the money”. Although this statement became famous in the 70s due to one of the greatest scandals of American politics , it represents an important pillar for all intelligence activities related to counterterrorism: to follow the movement of money is the conditio sine qua non to identify terrorist groups and the related threats, as well as the development of effective methods to counter and prevent them. At the same time, the reconstruction of such economic-financial flows proves that any terrorist organization cannot be separated from money as well as their ability to obtain, transfer and use it. Therefore, the analysis aims to offer a general overview of methods of jihadist terrorism financing, from the traditional method of hawala to the more innovative operations involving the so-called cryptocurrencies, within a new financial space known as Fintech. The use of practices and tools to carry out financial transactions dates back to the dawn of Islamic fundamentalism. It should be pointed out that most of the resources needed by terrorist organisations are not used to implement the attack itself (operational costs) but to maintain the cell and its development in the long-term (maintenance costs). This process of money transfer for terrorist purposes is not essentially illegal ab origine. There are two procedures: money laundering, i.e. the movement of money which already originates from illicit activities and needs to be ‘cleaned’ in order not to arouse suspicion; and money dirting, a group of transactions that originate from lawful activities, but which subsequently converge in carrying out of criminal activities.
2. 1. The bipolarity of Islamic hawala: an ethical instrument of informal money transfer and means of terrorism financing
The first financing method under analysis is hawala, a term that in Arabic means “transfer” or “payment order”. This “peer to peer” (P2P) money transfer system involves the following practice: the orderer residing or domiciled in country A contacts his trusted hawaladar (intermediary) to transfer the money on his behalf, including a small service charge, plus some personal information about the recipient and a security identification code; the intermediary contacts a second hawaladar who is resident in Country B and asks the latter to deliver to the recipient the equivalent of the amount agreed upon between the parties involved. The second hawaladar reaches the recipient of the money based on the personal information received from the other intermediary and delivers the money, after certifying his identity and and, after certifying his identity and asking him a few questions to assess his knowledge of the identification code, hands over the money. Unlike conventional banking circuits, where only the two parties to the agreement are involved as sender and receiver of the agreed amount of money for the transaction, and the banking institution as a legal entity, in hawala there are four physical parties involved.
What is interesting here is the anonymity of the transactions. There are no legal documents to certify the transaction between the parties. Intermediaries keep records of the transfers in which they are involved, but the keeping of a register has only an eminently practical purpose to keep track of their activities and the amounts to be received by the sender or paid to the second intermediary. Considering its informal, 'transparent' or even 'invisible' nature, the hawala system has raised increasing suspicions about its alleged links with criminal and terrorist organisations. The tragic 9/11 attack has marked the beginning of the West’s hostility towards this form of financing, as it can operate clandestinely and illegally in global market, so much so that it also uses the further denominations of ‘underground’, ‘shadow’ or ‘black’ channel, confirming once again the idea that “without money, there is no terrorism”.
3. The Fintech digital revolution: technology at the service of terrorism
The current global diffusion of Jihadism has meant that terrorist organisations need to exploit new technologies to accelerate and increase the chances of finding and transferring resources, as well as to increase the speed and cost-effectiveness of the operations. With the affirmation of Web 2.0 and the so-called ‘Internet of Things’ (IoT), opportunities provided to terrorism have multiplied, facilitating both the propaganda action and the use of new methods of electronic money transfer: a phenomenon that can be summarized with the term FinTech. The result of the crasis of words ‘technology’ and ‘finance’, represents the space where all technological innovations applied to financial services are enclosed. These consist of Artificial Intelligence and Big Data, smart contracts, mobile internet access and Distribution Ledger Technology (DLT), including Blockchain, the most important tool in the field of terrorist financing.
This is a chain of data blocks, where each new transaction block builds on the previous nodes, and where - while it is possible to know the origin and destination of the transaction, as well as the amount and nicknames of the parties - anonymity is guaranteed by the use of digital signatures called 'hash codes' (like fingerprints) that conceal sensitive personal information. Despite its widespread use, the blockchain nevertheless has several weaknesses, due to the slowness of confirming new transactions as a result of the high number of computers needed to carry out each operation (so-called 'mining'), given the greater computing memory required. As a consequence, the whole system will suffer in terms of integrity, speed and transparency, but also costs . The most famous example of a currency that works with the blockchain is Bitcoin.
4. Towards more anonymous financial transactions: open source tools
A technology to overcome the abovementioned inefficiencies is Tangle. Unlike blockchain, it is not developed in conventional blocks, since the consensus on a single transaction does not require the participation of all the nodes in the network (acyclic structure): each new transaction to be validated only requires the approval by its initiator of two previous randomly assigned transactions. It is more flexible than blockchain because it does not use mining and the code is consequently ‘lighter’. The very structure on which Tangle is based allows the system to scale, to have no maximum return limits and to operate without transaction costs.
The best-known cryptocurrency is Zcash, the first to be completely open-source and capable of fully protecting transactional privacy through a cryptographic system that should prevent the reconstruction of asset passages. Zcash's open source protocol ensures that the same company that developed and controls Zcash cannot control the distribution or mining of cryptocurrency. Younger and even more guaranteeing of anonymity is Monero, a digital currency created in 2014, which uses three standards to protect anonymity: Ring Signature, a cryptographic signature by which a transaction is collected in a group of similar transactions so that an outside observer will never be able to identify which key the transaction came from; Stealth Address, whereby only the sender will be able to trace the path of their money and verify whether the transaction was successful thanks to a personal code; Ring Confidential Transaction (RingCT), which obliges the user to bind the amount of their entire wallet. For every single transaction, two further outputs must also be specified: the amount to be sent with the transaction and the remaining amount of the wallet, which is expected to be returned as change.
The validation of the transaction takes place by calculating the sum of the two outputs entered by the sender, which must coincide with the total amount of money held in the wallet and bound upstream. The equivalence of the two amounts on the one hand certifies that no data has been falsified during the transaction by creating new cryptocurrency units, and on the other hand it serves to hide the amounts of the transactions.
5. Observations and conclusions
The anonymity and effectiveness of new financial technologies have made intelligence monitoring of terrorism-related activities problematic. What makes the situation even more critical is the fact that today's cryptocurrencies lack clear and comprehensive regulation: indeed, these currencies are the result of initiatives by private individuals and non-state actors and, at the same time, there is no international body with any legal authority that is unambiguously recognised by all Countries. There are, in fact, major differences in the laws of Member States, and this is an obstacle to joint control of all those suspicious activities structured on networks of international dimensions, going beyond the individual regulatory spaces of each Country. It is easy to deduce how the absence of regulation leads to criminality, and specifically terrorist organisations, to take advantage and operate without constraints .
In conclusion, considering what has been analysed above, new technologies not only hinder the tracking of financial flows for terrorist purposes because of the anonymity that they guarantee and protect, but also they prevent a correct reconstruction of the operations and the links existing between the various transactions at the basis of the same flow: it is not easy to understand whether the money comes from illegal activities, from individual Jihad supporters, State entities or paramilitary groups, or whether it is maintenance or operational costs. Internet of Things has increased the opaque nature of terrorist financing, with the aggravating factor that it is quicker and more effective for the Jihadist cause and, more widely, to the detriment of security of a country and its citizens.
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 It is referred to the ‘Watergate’ scandal, related to the espionage activity orchestrated by President Nixon against the Democratic Committee, during the presidential elections in 1974.
 A. ORSINI, Strategia Isis/ Attacchi low cost di una rete in crisi che tenta il ritorno; Il Messaggero, 30 Novembre 2019; https://www.ilmessaggero.it/editoriali/alessandro_orsini/attentato_londra_isis-4895045.html  Financial Action Task Force (FATF), Money Laundering and Terrorism Financing Typologies, Parigi, 2005.  A. QUATTROCCHI, La rilevanza penale del sistema di pagamento hawala nelle condotte di favoreggiamento dell’immigrazione clandestina, Diritto Penale Contemporaneo, Fascicolo 2/2019, p.22.The Arabic term means ‘trasfer’ o “payment order”, but also “trust” and “guarantee”.  Ibidem.  S. D’AURIA, Riciclaggio e Terrorismo, in Rivista GNOSIS, “Intrecci criminali”. gnosis.aisi.gov.it/gnosis/Rivista34.nsf/ServNavig/34-05.pdf/$File/34-05.pdf?  L. BUENCAMINO and S. GORBUNOV, Informal Money Transfer Systems: Opportunities and Challenges for Development Finance, Economic and Social Affairs, ST/ESA/2002/DP/26 DESA Discussion Paper No. 26, November 2002, p. 2.  “Underground”, “Shadow” or “Black hawala”. E. THOMPSON, Misplaced Blame: Islam, Terrorism and the Origins of Hawala, Max Planck Yearbook of United Nations Law Online, 2007, p. 279.  J. CASSARA for COMMITTEE ON HOMELAND SECURITY, Terrorist Financing Since 9/11: Assessing An Evolving Al- Qaeda And State Sponsors Of Terrorism, House Hearing - 112 Congress (from the U.S. Government Publishing Office), 28 May 2012.
 P. SCHUEFFEL, Taming the Beast: A Scientific Definition of Fintech, Journal of Innovation Management, 2016, Vol.4(4), pp.32- 54. S. BERMAN. (2012), "Digital transformation: opportunities to create new business models", Strategy & Leadership, Vol. 40 No. 2, pp. 16-24. https://doi.org/10.1108/10878571211209314  P. SOLDAVINI, Che cos’è la blockchain e come funziona, Il Sole 24 Ore, 30 marzo 2018, https://stream24.ilsole24ore.com/video/tecnologie/cos-e-blockchain-e-come-funziona/AE4aV1PE  D. YAGA, P. MELL, N. ROBY, K. SCARFONE, Blockchain Technology Overview, National Institute of Standards and Technology – US Department of Commerce, ottobre 2018, pp. 7 e ss..
 A. GRECO, IOTA, cos’è e come funziona, 08/01/2019, Medium.com, https://medium.com/blockchain-italia/iota- cos%C3%A8-e-come-funziona-83411db8d2c6  K. M. ALONSO, Monero, privacy in the Blockchain, 2017. http://openaccess.uoc.edu/webapps/o2/bitstream/10609/75205/6/alonsokTFM0118memoria.pdf  Ibidem.  The current analysis was aimed to provide an exclusivelly generic and overall framework about the opportunities that finance offers to terrorism. In the next publications, we shall deal specifically with the single methods and technologies at the service of the Jihad, delving into the complex and delicate relation that the financial instruments have with the communication channels and the social media for the circulation of money.
- A. GRECO, IOTA, cos’è e come funziona, 08/01/2019, Medium.com, https://medium.com/blockchain-italia/iota-cos%C3%A8-e-come-funziona-83411db8d2c6
- A. ORSINI, Strategia Isis/ Attacchi low cost di una rete in crisi che tenta il ritorno; Il Messaggero, 30 Novembre 2019; https://www.ilmessaggero.it/editoriali/alessandro_orsini/attentato_londra_isis-4895045.html
- A. QUATTROCCHI, La rilevanza penale del sistema di pagamento hawala nelle condotte di favoreggiamento dell’immigrazione clandestina, Diritto Penale Contemporaneo, Fascicolo 2/2019;
- D. YAGA, P. MELL, N. ROBY, K. SCARFONE, Blockchain Technology Overview, National Institute of Standards and Technology – US Department of Commerce, ottobre 2018,
- E. THOMPSON, Misplaced Blame: Islam, Terrorism and the Origins of Hawala, Max Planck Yearbook of United Nations Law Online, 2007
- Financial Action Task Force (FATF), Money Laundering and Terrorism Financing Typologies, Parigi, 2005;
- J. CASSARA for COMMITTEE ON HOMELAND SECURITY, Terrorist Financing Since 9/11: Assessing An Evolving Al-Qaeda And State Sponsors Of Terrorism, House Hearing - 112 Congress (from the U.S. Government Publishing Office), 28 May 2012;
- K. M. ALONSO, Monero, privacy in the Blockchain, 2017. http://openaccess.uoc.edu/webapps/o2/bitstream/10609/75205/6/alonsokTFM0118memori a.pdf
- L. BUENCAMINO and S. GORBUNOV, Informal Money Transfer Systems: Opportunities and Challenges for Development Finance, Economic and Social Affairs, ST/ESA/2002/DP/26 DESA Discussion Paper No. 26, November 2002;
- P. SCHUEFFEL, Taming the Beast: A Scientific Definition of Fintech, Journal of Innovation Management, 2016, Vol.4(4), pp.32-54;
- P. SOLDAVINI, Che cos’è la blockchain e come funziona, Il Sole 24 Ore, 30 marzo 2018, https://stream24.ilsole24ore.com/video/tecnologie/cos-e-blockchain-e-come- funziona/AE4aV1PE;
- S. BERMAN. (2012), "Digital transformation: opportunities to create new business models", Strategy & Leadership, Vol. 40 No. 2, pp. 16-24. https://doi.org/10.1108/10878571211209314;
- S. D’AURIA, Riciclaggio e Terrorismo, in Rivista GNOSIS, “Intrecci criminali”.