This report explores the regulatory challenges presented by the rapid growth and proliferation of e-payment systems with respect to countering the financing of terrorism (CFT). The article first draws an important distinction between m-banking and other e-payment systems. It then proceeds by addressing two key interlocking issues that appear to cloud the regulatory environment for these systems: jurisdictional issues and definitional issues. The core of the jurisdictional problem lies in the disconnect between the globalised nature of e-payment services, the World Wide Web and rapidly evolving information technologies on the one hand, and state-centric domestic and international legal and regulatory frameworks on the other. E-payment transactions often de-territorialize financial transactions from states and thus raise difficult questions about the legal jurisdiction of regulatory authorities.

This is the second of three reports addressing the unregulated financial sector in regard to its use for the financing of terrorism.  The first report discussed the anticipated shift from low-tech informal value transfer systems (IVTS) to increasingly high-tech IVTS.  It specifically explored mobile banking (m-banking) as an emerging path for TF.  The third report will examine the regulatory challenges and possible responses to high-tech IVTS. 

This report examines two additional and interrelated high-tech modalities that are vulnerable to TF:  virtual currencies (or ‘e-currencies’) and massive multiplayer online games (MMOGs).  Virtual currencies are digitized forms of money issued by private sector companies that function without the backing of national governments.  Overlapping with virtual currencies are virtual worlds which are also known as MMOGs.  MMOGs are virtual online worlds where hundreds of thousands of people can meet and interact simultaneously via the Wide World Web.  Second Life is perhaps the most prominent example.  Virtual worlds often contain unregulated economies in which substantial sums of money can be exchanged anonymously without government oversight.  E-currencies and MMOGs are generally unregulated and the industries involved have heretofore not undertaken baseline Know-Your-Customer procedures. Therein lies the danger.

Six years since 9/11, securing the financial front remains central to the fight against al-Qaeda, its affiliates and associated cells.  US-led initiatives to combat the financing of terrorism are often cited as the most effective weapons in the counter-terrorism arsenal.  In its December 2005 report, for example, the 9/11 Commission rated US and partner governments’ progress in countering the financing of terrorism (CFT) higher than any of the other 41 areas assessed.  To date, the US and its allies have frozen or seized some $200 million of terrorists’ assets.  In this new kind of war, where measurable progress is often an elusive concept, the fight to secure the financial front has achieved tangible results. Indeed, a substantial sum of terrorist money has been taken out of circulation, and much praise is due to the global financial community for undertaking a greater role in complying with additional CFT requirements.  Yet, it is remarkable that the overwhelming majority of asset freezes and seizures took place in the first two years after 9/11.  Since 2003, the money trail has largely dried up.  What explains this steep decline?