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.
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.”