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Insights into Editorial: Demonetisation and Beyond: Addressing the Finance of Terrorism

 

 


Insights into Editorial: Demonetisation and Beyond: Addressing the Finance of Terrorism


 

Summary:

The changeover of high denomination notes in India is arguably a major strategic step that has been lauded by many Indians. The gaping chasm between our legal and illegal economy had reached an alarming state where the anti-national elements ranging from corrupt officials and tax evaders to state sponsored terrorists had a free run through India’s security apparatuses. Among others, demonetization has badly affected terror financing in the country.

 

Finance of terrorism in India:

There are four essential elements needed by terrorists and organised crime groups to achieve its objectives – mobility, logistic bases, communications and financing. The finance of terrorism in India follows a hybrid model, which includes terror funding from within and beyond the country’s borders. An assessment of past cases that have come to light suggests that terrorists have employed a variety of channels to fund their activities.

 

Various forms of terror financing and the impact of demonetization on them:

Terror financing falls mainly into three categories:

  1. Tactical terror financing: It is the money needed to mount specific operations. This aspect would remain unaffected by the demonetisation of Rs 500 and Rs 1000 notes for the simple reason that terror operations are incredibly cheap and can be funded by kosher resources.
  2. Operational terror financing: This includes funds required for running a low-intensity campaign like the ISI-sponsored ‘thousand cuts’ strategy in Kashmir. More than tactical financing, it is operational financing that is well within the capability of state-sponsored terrorism. Equipping a few hundred terrorists with assault rifles, explosives, communication tools and blood money is well under a few score crores. However, demonetisation per se will not put a dent on this.
  3. Counterfeit currency: Damaging our economy by flooding counterfeit currency is the main strategic prong of terrorist groups. The demonetisation will disrupt it only for a brief period until the terrorist groups replicate the new format of high denomination notes. Granted that the newer currency will be harder to replicate, but if Indian mints can make them, so can Pakistani. Additionally, they only need to make a near replica to pass the muster and not an exact copy.

 

Other forms of terror financing:

Banking channel: Amongst formal channels, money has been moved through the banking channels, as was witnessed prior to the 1993 Mumbai bomb blasts. It can also involve the use of money transfer service scheme (MTSS), as has been resorted to repeatedly by the Indian Mujahideen (IM) to finance their operations in India. Benefactors in Pakistan transferred money to innocuous middlemen not previously suspected of terrorist linkages in India. This money was later withdrawn and handed over to IM cadres to fund their activities. Squeeze of cash flow due to demonetization could witness increase in exploitation of formal channels by NGOs.

Barter trade: There have also been attempts to exploit the barter trade between India and Pakistan through over or undervaluing the invoice, thereby creating a surplus value, which was then diverted for funding terrorism. Demonetization would have impact on this limited given low volume of trade with Pakistan. Squeeze of cash flow could witness increase in exploitation of trade with other countries through proxies.

Movement by cash: Money is also transferred in the form of cash across borders through couriers, and thereafter converted into Indian currency to support terror funding. Cash also forms the last mile instrument of choice, for financing both organisational activities and terrorist operations. This includes money spent for buying weapons, paying cadres, or organising terror strikes. This is especially the case with groups which collect their funds directly in the form of extortion, kidnapping or so called taxation etc. With demonetization, the groups which have most of their financial reserves in the form of cash are likely to be affected the most. Subsidiary money parking options like property could also be affected adversely affected due to limited liquidity.

Real estate: There have also been cases of money being invested in real estate deals or investments in businesses both inside and beyond Indian borders, to cater for long term needs.

Hawala: The last, and possibly the most commonly used method of transferring value remains hawala in the Indian context, especially by Pakistan and Pakistan based terror groups which have been fuelling, funding and coordinating terrorism in Jammu and Kashmir (J&K) as well as through the IM. This does not involve the physical movement of cash across borders, but through the employment of hawaladars or hawala agents to collect and disburse money across different countries and continents. However, they will have the maximum impact by demonetization.

demonetisation

 

Demonetization alone is not sufficient in fight against terror financing. What else needs to be done?

  • Two of the most vulnerable sectors that have traditionally been exploited for parking crime proceeds and black money is the property, and gems and jewellery market. These sectors have also been used for the temporary investment of terror funds. Unless transactions are made transparent and reflect real market value, black money and terror funds will continue to find their way into these businesses.
  • Fake currency can potentially be reintroduced into India after a break by Pakistan. In order to sustain action, enhanced detection measures at public sector banks should be put in place. A forensic cell should be established to monitor each case of counterfeit currency to better understand the technology being applied to counterfeit notes. This must contribute to future measures to enhance security against counterfeiting.
  • Demonetisation provides an opportunity to encourage a shift to a digital economy. This is an essential requirement to not only reduce corruption but also create an electronic trail for transactions. This will help bring transparency into the financial transactions of individuals and organisations thereby constraining corruption, criminal proceeds, money laundering and the finance of terrorism, which are all linked given the common channels employed for transferring funds. Suitable measures should be put in place to shield our digital economy.
  • A large percentage of funds have been routed through NGOs in West Asia, especially in case of Kashmir. The government should make it clear that each institution receiving funds must register itself and seek clearance for receiving funds from foreign sources. The controlling group of the NGO or establishment receiving money should be clearly established. A government panel of charted accountants should audit the accounts of these NGOs.
  • The finance of terrorism should become a priority area for intelligence and enforcement agencies.

 

Way ahead:

Demonetisation is not a complete and all-encompassing end in itself. It is part of a process which must be taken forward through additional allied and subsidiary policies. There is a need to take interlinked steps and it is only the sum of these individual initiatives that can impact the larger fight against the financing of terrorism.

 

Conclusion:

Demonetisation is an important step in the fight against the finance of terrorism. However, it should neither be the first nor the last, if the interlinked threats of corruption, crime and the finance of terrorism have to be controlled. These must also not be addressed simply within departmental and ministerial silos. Instead, an all-of government approach is imperative if each of these challenges is to be met.