Cryptocurrencies And Risk Under The Antiterrorism Act

• Published date: 15 June 2023
• Subject Matter: Government, Public Sector, Technology, Terrorism, Homeland Security & Defence, Fin Tech
• Law Firm: Jones Day
• Author: Mr Steven T. Cottreau (Steve), James Gauch, Fahad Habib, Alexander Wilson, Goldberg Knox, Gabrielle Pritsker and Justin D. Rattey

In Short

The Situation: Terrorists may be increasingly turning to cryptocurrencies to evade sanctions and finance terrorist acts, as recent prosecutions and reports suggest. Under the Antiterrorism Act ("ATA"), as amended by the Justice Against Sponsors of Terrorism Act ("JASTA"), companies working with cryptocurrencies may expose themselves to civil terrorism litigation or governmental investigations if they indirectly support operatives perpetrating terrorist acts'such as through the provision of banking services, or assistance transacting with, transferring, or "mixing" cryptocurrencies.

The Result: Cryptocurrency companies may find themselves targeted in civil actions and criminal investigations as the use of cryptocurrencies by terrorists continues. Even when such claims rest on weak foundations, ATA cases may require costly investigations and litigation.

Looking Ahead: Companies should review their due diligence practices with respect to existing customers and new business opportunities to account for sanctions compliance considerations and exposure under the ATA, particularly to the extent they or their suppliers or counterparties operate in regions where terrorism is prevalent. Companies should also prepare to retain seasoned ATA litigation counsel should they face allegations in connection with terrorism-related civil litigation and criminal investigations.

Reported Terrorist Use of Cryptocurrencies

Since the late 2000s, cryptocurrencies have exploded in growth and popularity. Even accounting for recent turbulence in the sector, such currencies'including Bitcoin, Litecoin, and Ethereum'and organizations participating in that sector continue to proliferate. Most cryptocurrencies are not managed by central authorities or administrators. Instead, they rely on algorithms and distributed ledgers (sometimes referred to as "blockchains") for accounting, and on cryptography for security and transaction validation. Although cryptocurrencies can serve a variety of purposes, their decentralized nature and the potential anonymity of users make them especially attractive to criminals, including terrorists.

The U.S. government and the United Nations ("U.N.") have sounded the alarm about the potential malign uses of cryptocurrencies by criminal enterprises. The U.N. Security Council has expressed "grave concern" at the potential for financial technologies such as cryptocurrencies to be "misused, including for terrorist financing." The U.N. Counter-Terrorism Committee Executive Directorate estimates that the use of cryptocurrencies by terrorist organizations is growing'financing as many as 20% of terrorist attacks.

Because some features of cryptocurrencies make them attractive to malicious actors, companies operating in the cryptocurrency space'token manufacturers and "miners"; those enabling businesses to transact using cryptocurrencies; those "mixing" cryptocurrencies (a process enabling even greater anonymity); and others'may face heightened risks of being exploited by terrorists.

Among other things, cryptocurrency technologies "pose a more complex money trail for financial investigators to follow." Foreign states'including North Korea and Iran'have relied on that feature to circumvent U.S. sanctions. As documented by the Congressional Research Service, North Korea recently attempted to convert one cryptocurrency into another (a practice referred to as "chain-hopping") to launder...