How Hate Groups Ex­ploit Fin­tech

Al­most no bank or fin­tech com­pany wants to en­able hate groups — even bit­coin ex­changes don’t want them — but these groups still find ways to move money.

ISO & Agent - - TECHNOLOGY KNOW YOUR CUSTOMER - BY NICK HOL­LAND

The events of Char­lottesville, Va., have ex­posed the dark un­der­belly of hate groups and their me­dia chan­nels, and raised fresh ques­tions about how they get fund­ing. Nu­mer­ous pay­ments play­ers have clamped down on hate groups’ ac­cess to funds in the wake of the Char­lottesville rally, an event that re­sulted in the death of one coun­ter­protester and two po­lice of­fi­cers. How­ever, given the de­cen­tral­ized and lawless na­ture of the in­ter­net, hate groups can find their own ways to move money even af­ter the main­stream fi­nan­cial sys­tem has kicked them out.

At the epi­cen­ter of the post- Char­lottesville purge was The Daily Stormer, a neo-nazi pub­li­ca­tion that quickly be­came a pariah for ISPS and pay­ment net­works as a key en­abler of white su­prem­a­cist hate and in­cen­di­ary com­men­tary. Posts on the site high­lighted that even Bit­coin fund­ing was be­ing cut off, as Coin­base — one of the pri­mary cryp­tocur­rency ex­changes — sus­pended not just The Daily Stormer’s ac­count, but the ac­counts of those at­tempt­ing to send funds to its bit­coin wal­let for vi­o­la­tion of the ex­change’s Ac­cept­able Use Pol­icy (AUP).

The irony is that, rather than cut hate groups out of the fi­nan­cial ecosys­tem, these bans have in­stead turned them into in­no­va­tors.

Even within the con­fines of the main­stream fi­nan­cial ser­vices sys­tem, hate groups have de­vel­oped in­ven­tive ways to move funds.

The mas­sive, de­cen­tral­ized na­ture of the in­ter­net makes polic­ing by mer­chant ser­vice providers ( MSPS) an oner­ous task and in­evitably some sites ped­al­ing il­licit con­tent and ma­te­ri­als will fall through the cracks. This is where trans­ac­tion laun­der­ing oc­curs.

Ac­cord­ing to Pci­com­pli­ance.org, trans­ac­tion laun­der­ing takes a num­ber of forms —

• A front com­pany that passes the due dili­gence un­der­writ­ing tests, but also laun­ders money or sells il­le­gal prod­ucts.

• A pass-through com­pany with a le­git­i­mate pro­cess­ing ac­count takes on a “silent part­ner.”

• A le­git­i­mate busi­ness acts as a fun­nel ac­count, ac­cept­ing card charges from com­pa­nies that do not have mer­chant pro­cess­ing ac­counts.

Trans­ac­tion laun­der­ing is not to be underestimated. Trans­ac­tion laun­der­ing on­line sales of prod­ucts and ser­vices topped $159 bil­lion in 2016 in the US alone, ac­cord­ing to an es­ti­mate from Ron Te­icher, CEO of Ever­com­pli­ant, an in­ter­net se­cu­rity com­pany. Of this, some $4.6 bil­lion in­volved il­le­gal goods, which were sold on­line by an es­ti­mated 100,400 un­reg­is­tered mer­chants.

“Ex­ac­er­bat­ing the prob­lem is the

plethora of pay­ment meth­ods that have ap­peared in re­cent years,” says Te­icher. “If in the past, ac­quir­ers, banks and other in­sti­tu­tions fo­cused on web­sites as the nexus of trans­ac­tion laun­der­ing, the mo­bile era has opened up a whole new play­ground for scam­mers to op­er­ate in.”

The con­tin­ued flight from one MSP to an­other even­tu­ally reaches a point where tra­di­tional pay­ments chan­nels are ex­hausted. But once caught out and cut off, there is still a con­tin­uum of op­tions avail­able to so- called pay­ment hustlers.

“Pay­ment hustlers ro­tate pay­ments meth­ods un­til the path of least re­sis­tance is found,” says Dan Frechtling, chief prod­uct of­fi­cer at G2 Web Ser­vices. “This can fol­low a pat­tern of A, B, C. Plan A, or ‘ac­quir­ers,’ is ini­tially suc­cess­ful but of­ten leads to a re­jec­tion af­ter banks and PSPS dis­cover trans­ac­tion laun­der­ing. This is fol­lowed by Plan A1, ‘Al­ter­na­tive Pay­ment Meth­ods,’ then Plan B, ‘ bank pay­ments,’ fol­lowed by Plan C, ‘cryp­tocur­ren­cies.’ Pay­ment hustlers look for the most hos­pitable en­vi­ron­ment to mon­e­tize for­bid­den e- com­merce.”

How­ever, even the ABCS can be ex­hausted, as The Daily Stormer dis­cov­ered when the site and its donors were cut off from fund­ing via “main­stream” cryp­tocur­ren­cies by the Coin­base ex­change.

As it turns out, bit­coin may not be the lawless cash al­ter­na­tive that many imag­ined it to be.

“Last year, as tra­di­tional cryp­tocur­ren­cies were proven to be sub­op­ti­mal mech­a­nisms for dis­guis­ing il­le­gal trans­ac­tions from law en­force­ment there was a shift among cer­tain groups from us­ing the most pop­u­lar cryp­tocur­ren­cies like BTC and LTC, to­wards so- called ‘pri­vacy coins,’ such as Monero and Zcash,” says Al Pas­cual, se­nior vice pres­i­dent at Javelin Strat­egy & Re­search. “Pri­vacy coins ob­scure the par­ties in each trans­ac­tion, mak­ing them at­trac­tive for in­di­vid­u­als and or­ga­ni­za­tions that wish to keep their fund­ing off the radar, such as fraud­sters, hate groups and ter­ror­ists.”

The rel­a­tive ease with which altcur­ren­cies can be funded via ini­tial coin of­fer­ings is in­spir­ing some to de­velop plat­forms that are more wel­com­ing of hate groups.

Gab is an ex­am­ple of a player that it tak­ing cur­rency into its own hands. Gab pro­motes it­self as a non-po­lit­i­cally af­fil­i­ated anti- cen­sor­ship plat­form, and it hosts sev­eral high-pro­file far-right or “alt-right” users who have been banned from other ser­vices over hate speech or ha­rass­ment.

In the wake of the events of Char­lottesville, Gab’s app has been re­moved from both Ap­ple and Google’s app stores. Ac­cord­ing to Gab’s chief op­er­at­ing of­fi­cer, Ut­sav San­duja, the com­pany is plan­ning an ICO for its own cryp­tocur­rency.

“We are go­ing to be us­ing the blockchain and in­cor­po­rat­ing el­e­ments of the Ethereum network,” says San­duja. “Gab’s over­all plans are to help de­velop a Web 3.0 that al­lows for true peer-topeer de­cen­tral­iza­tion. A lot of this work is be­ing done by The Free Speech Tech Al­liance, a team of 100-plus en­gi­neers and whistle­blow­ers from Sil­i­con Val­ley want­ing to take on the du­op­oly that is Ap­ple and Google, both who con­trol over 95% of the mo­bile dis­tri­bu­tion mar­ket. Even­tu­ally, we will re­place Paypal and work with the banks di­rectly as a pro­ces­sor of dig­i­tal cur­ren­cies.”

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