Governance

Demonetisation and terror financing

GOVERNANCE / demonetisation / terrorism

by Akanksha Narain
terrorism-in-indiaThe ‘Demonetisation’ scheme announced by Prime Minister Narender Modi in November 2016 was aimed, among other things, to hit out at terrorist funding. As we reach the six month threshold, Akanksha Narain analyses whether the decision to replace the existing 500 and 1,000 rupee notes from circulation has impacted terrorism funding and is it enough to have a long-term impact on terror funding and militant activities, especially in a scenario where terrorist encounters are a frequent occurrence even today.



ON November 8, 2016, Prime Minister Narendra Modi, in a sudden move, announced his government’s decision to discontinue the legal tender status of Rs. 500 and Rs. 1,000 notes and instead introduce new 500 and 2,000 denomination currency. This ‘demonetisation’ policy, according to the PM, was aimed at tackling black money, counterfeit currency, disrupting criminal activities and terror financing.

The impact of the demonetisation policy, as related to curbing the finance of terrorism, is gradually emerging from the shadow of its surprise announcement. So, after nearly six months, has demonetisation achieved its objectives? And, were its achievements, if any, worth the pain, disruption and despair caused to so many millions in the country, especially when there are reports that the new currency is gradually inching its way back into terror organisations.

Since there were widespread reports of the usage of Fake Indian Currency Notes (FICN) for financing of terrorism and drug financing, both the government and the Reserve Bank of India (RBI) felt that demonetisation can contain it. In a note given to Parliament’s Department Related Committee of Finance, the RBI has said: “It occurred to the Government of India and the Reserve Bank that the introduction of new series of notes could provide a very rare and profound opportunity to tackle all the three problems of counterfeiting, terrorist financing and black money by demonetising the banknotes in high denominations of Rs. 500 and Rs. 1,000 or by withdrawing legal tender status of such banknotes.”

Though, the Finance Ministry has reiterated that the demonetisation exercise has had a “positive impact” on terror financing, in its submission to the Public Accounts Committee (PAC), the Ministry has admitted that no counterfeit notes were seized by agencies from November 8 to December 30. While an amount of Rs. 474.37 crore in new and old currency was seized by the Income Tax department during the demonetisation drive from November 9 to January 4, the Ministry has said it has no information whether the persons from whom the cash was seized were terrorist groups or smugglers.

To a specific question by the PAC on how many counterfeit notes of Rs. 500 and Rs. 1,000 have been seized from terrorist groups, smugglers of arms, drugs and spies until December 30, the Ministry said, “No counterfeit currencies have been seized by agencies under CBEC (Central Board of Excise and Customs) since November 8, 2016, till December 30, 2016.”

Though, the Finance Ministry has reiterated that the demonetisation exercise has had a “positive impact” on terror financing, in its submission to the Public Accounts Committee (PAC), the Ministry has admitted that no counterfeit notes were seized by agencies from November 8 to December 30

Of the total cash seizures between November 8 and January 4, 2017, Rs. 112.29 crore was in new currency. A search on 36 hawala operators across the country could bring out new currency worth Rs. 20 lakh only!

Nature of Threat
Firstly, it is important to outline the nature of threat faced by India as part of the ongoing fight against the finance of terrorism. The finance of terrorism in India includes terror funding from within and beyond the country’s borders. Amongst formal channels, money has been moved through 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. There have also been attempts to exploit the barter trade between India and Pakistan through over or under valuing the invoice, thereby creating a surplus value, which was then diverted for funding terrorism.



narender-modi-speech-on-Demonetisation

Prime Minister Narendra Modi announcing the withdrawal of 500 and 1,000 rupee notes on November 8, 2016

As part of the informal channel, large amounts of money are also received in the form of counterfeit currency or FICN that are smuggled into India by air, land and sea. The transfers have at times been routed through third countries in West, South or Southeast Asia. These have also been smuggled across the borders through existing criminal networks.

However, the most commonly exploited method of transferring terror funds remains cash. Money is 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. The resultant funds generated are stored as cash or gold. There have also been cases of money being invested in real estate or investments in businesses both inside and beyond Indian borders, to cater for long term needs.

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.

Impact of Demonetisation
TO draw a co-relation between demonetisation and its impact on each of the formal and informal channel of terror funding, it is important to examine the role played by 500 and 1,000 rupee denominations at various stages of the finance of terrorism cycle.

The financial hit likely to be taken by a terrorist group is closely linked with its cash reserves, the ability to retain liquidity in a business where terror groups choose to invest and the ease of reconverting these assets into liquid money. Groups in Northeast India and the CPI (Maoist) operating in the Naxal affected areas of the country are likely to be hit the most, as a large proportion of their financial reserves are more likely to have been held as cash. Further, investments in property will become relatively difficult to liquidate to recreate funds for organisational support mechanisms.

In contrast, Pakistan and J&K-based terror groups, while impacted, will be able to recuperate faster as they are financed by the Pakistani State, rich donors in West Asia, voluntary collections in Pakistan, FICN or drug money. None of these can be impacted in the long term to an extent that terror organisations are unable to sustain themselves. However, the impact will certainly be felt in the immediate and midterm future, wherein, the cash available for sustaining activities, like civil disobedience in Kashmir Valley, will be sucked out of the terror economy.

Though demonetisation can potentially create the necessary conditions for combating the finance of terrorism and is an important step in the fight against the finance of terrorism, it is neither the first nor the last if the interlinked threats of corruption, crime and the finance of terrorism have to be controlled. The objective of demonetisation is linked with removing unaccounted wealth (black money), criminal proceeds (which is different from black money), as well as FICN and Indian currency hoarded and distributed by terrorist groups. Merely removing a major portion of cash alone will not resolve any of these challenges.

Clearly, the policy cannot serve as a ‘final solution’ to combat violence, fake currency and black money in the system. The policy may temporarily weed out fake currency in the system, but it cannot stop the flow of new and improved forged currency entering the system. Counterfeiting does not require identical replicas, just ‘good enough’ to create distrust in the monetary system

The finance of terrorism is yet to become a priority area for Indian intelligence and enforcement agencies. While funding of terrorism by Pakistan in J&K may be an almost 30-year-old phenomenon, groups in Northeast India have continued to extort the local population blatantly for almost seven decades. This has been facilitated by the inability of the State to clamp down on these groups. Some of these regions have also witnessed collusion between powerbrokers and militant groups, which has been complicit in the creation and utilisation of terror funds. The impact of demonetisation must therefore be seen in the context of corruption, crime, money laundering and the financing of terror being closely linked as a symbiotic contagion that collectively affects the security of the country.


The global scenario

ZIMBABWE, Fiji, Singapore and Philippines are some of the other countries to have opted for currency demonetisation.

Nigeria’s economy collapsed after the 1984 demonetisation move that did not go as planned. The military government of then President Muhammadu Buhari introduced different coloured notes to invalidate their old currency in order to fight black money. However, the debt-ridden and inflation hit country did not take the change well and the economy collapsed.

In 1982, Ghana rolled out the decision to demonetise their 50 cedi currency notes in order to tackle tax evasion and empty excess liquidity, monitor money laundering and corruption. The change created chaos across the country and finally resulted in a move back to physical assets and foreign currency, which obviously made the economy weak.

From December 2016, Pakistan has phased out the old notes as it will bring in new designs. Pakistan legally issued the tender a year-and-a-half back, and, therefore, the citizens had time to exchange the old notes and get newly designed notes. Pakistan’s government plans to implement this demonetisation over the next three to five years, in contrast to India’s accelerated approach.

Zimbabwe used to have $100,000,000,000,000 note. Yes, a one hundred trillion dollar note! The Zimbabwean economy went for a toss when President Robert Mugabe issued edicts to ban inflation through laughable value notes. After demonetisation, the value of trillion dollars dropped to $0.5 dollar and were also put up on eBay.

The demonetisation that happened in North Korea in 2010 left people with no food and shelter. Kim-Jong ll introduced a reform that knocked off two zeros from the face value of the old currency in order to banish black market.

Mikhail Gorbachev ordered to withdraw large-ruble bills from circulation to take over the black market. The move didn’t go well with the citizens, which resulted into a coup attempt, brought down his authority and led to Soviet breakup.

Australia became the first country to release polymer (plastic) notes to stop widespread counterfeiting. Since the purpose was to replace paper with plastic and only the material changed, it did not have any side-effects on the economy.

In 1987, Myanmar’s military invalidated around 80 per cent value of money to curb black market. The decision led to economic disruption leading to mass protests and resultant loss of many lives.

In Zaire, Dictator Mobutu Sese Seko’s administration laid out back-to-back currency reforms along with a plan to withdraw obsolescent currency from the system in 1993. The reform was not well received by the public and resulted in increasing economic disruptions. Mobutu was ousted in 1997.

On December 11, 2016, Venezuela-whose inflation rate is estimated to touch 475 per cent this year-announced demonetising its most valuable note, the 100-bolivar bill. The Nicolás Maduro-led government gave citizens a 72-hour window before withdrawing the currency, which accounted for 77 per cent of the nation’s cash in circulation. The government believed that cross-border mafia has been buying Venezuelan bolivars and selling them for vast profits in Colombia. However, the government was forced to give citizens an extended deadline for the use of the 100 bolivar bill after a serious shortage of currency led to violent protests and looting.

In contrast, countries which were successful in carrying out demonetisation are in the European Union. The countries which joined European Union in the beginning phased out their respective currencies and adopted Euro in 2002. In order to switch to the euro, authorities first fixed exchange rates for the varied national currencies into euros. When the euro was introduced, the old national currencies were demonetised. However, the old currencies remained convertible into euros for a while so that a smooth transition through demonetisation would be assured.

In the United States of America, the highest value of denomination currently in production is the $100 bill. But, in decades past, the Federal Reserve has issued $1,000, $5,000, $10,000 and even $100,000 bills. The US stopped printing the $1,000 bill and larger denominations of currency by 1946, but these bills continued circulating until the Federal Reserve decided to recall them in 1969.

Days after the controversial move was introduced, the then Defence Minister, Manohar Parrikar, claimed that post ‘demonetisation’, J&K registered a steady decline in violent activities. In 2016, Kashmir Valley had become a hotbed of protests and violence in the aftermath of Burhan Wani’s death, a local Hizbul Mujahideen leader. While both the government and the minister claimed that ‘demonetisation’ will dry the wells of black money and, in turn, sources of terrorist funding, just a few days after the scheme was rolled out, militants in Kashmir were caught with new 2000 rupee notes! What is being witnessed in the Kashmir Valley over the past few weeks-stone pelters and attack on uniformed men-totally belies this claim.

Therefore, one needs to analyse the stated impact of the move on terrorism and other security threats in India in light of the ground realities.

Positive Impact on Fighting Terrorism
THE ideology and traction of a terrorist organisation has limited impact without the backbone of finance. The ability to carry out attacks, fill ranks with committed fighters and pay them, buy weapons, carry out propaganda, are all dependent on financial resources which, in turn, determine the credibility of threat from the concerned group or organisation.

It is expected that the ‘demonetisation’ process will affect terrorism only in the short term as it will be able to suck out the FCIN in the economy. FCINs, which are largely introduced into the Indian economy by neighbouring nations (and other non-State actors), are crucial to funding terrorist activities, be it for buying weapons or funding the last leg of any terror activity (transportation, food, accommodation, etc.).

Despite the positive intentions of the policy, the focus of demonetisation and its impact on the country’s security is exceedingly myopic. While it attempts to target fake currency notes and black money in the system, it is bound to have a very limited and short term impact on the sources of terror financing and its enabling actors.

To the government’s credit, the new policy will create hurdles for militant and terrorist organisations that rely on extortion, kidnapping and taxation for income generation, i.e. deal with large amounts of liquid cash. Groups, especially Naxals, will face the brunt of replacing currency and the resultant cash crunch in the short term, which will limit the scope of their activities.

The first limiting factor of the policy is the assumption that money which is used to fund militant activities is all parked in liquid form, i.e. loose cash. This is far from the truth! While small sleeper cells and individuals might keep cash, terror groups (and others involved in illegal activities) keep cash reserves in the form of gold-the favourite form of investment for Indians as well! Moreover, they have also been known to invest their money in real estate, businesses and shell companies. This ensures that not only is their money parked safely, but also that it continues to grow. Therefore, declaring big legal tenders as illegal in order to drain terror organisations of their financial resources will not handicap these groups. While it does reduce their current cash reserves, it will not leave them defunct.

Though demonetisation can potentially create the necessary conditions for combating the finance of terrorism and is an important step in the fight against the finance of terrorism, it is neither the first nor the last if the interlinked threats of corruption, crime and the finance of terrorism have to be controlled

Second, the policy also assumes that money enters the country and/or reaches such organisations only through illegal methods. Terrorists employ a range of channels to fund their activities, which include kosher channels too. In the past, money has been transferred using the banking system and at the same time MTSS have also been employed. In order to escape detection, benefactors outside India transfer funds to persons who have in the past not been suspected of involvement in any terror activities. Later these individuals withdraw cash and pass it to terrorist groups; the Indian Mujahideen has been known to use such methods in the past.

There have been instances wherein benefactors in West Asia have transferred funds to NGOs, especially in Kashmir, which in turn have been used to fund violent activities. The Indian government has made an attempt to mitigate such nefarious activities by tightening the noose around international funding for NGOs. However, is it an attempt to reduce misuse of funds for carrying out violent activities, or does it stem from the desire to subvert the proactive stance taken by many NGOs that put the government in a corner, remains a question unanswered.

‘De-monetisation’ as a decision appears to be obsessed more with ‘navel-gazing’ than focusing on a grander picture of security. It fails to address the issue of over-valued sales, thus creating cash surpluses, which are in turn diverted towards illegal activities including terror financing. The policy only adds a minor inconvenience of rendering current cash reserves as worthless, but doesn’t stop any future illegal activity. However, with a significant population still being regularly caught with large cache of new notes, despite weekly withdrawal limits introduced by the government, sheds light on the structural loopholes that allow for illegal activities to be carried out and parallel economies to still exist.

Clearly, the policy cannot serve as a ‘final solution’ to combat violence, fake currency and black money in the system. The policy may temporarily weed out fake currency in the system, but it cannot stop the flow of new and improved forged currency entering the system. Counterfeiting does not require identical replicas, just ‘good enough’ to create distrust in the monetary system.

THE growing trend of counterfeit currency (in new 500 and 2000 rupee notes) entering India via Bangladesh indicates the possibility of counterfeiters already being able to flood the Indian economy. The fact that “three of five ATMs in India use outdated technology and lack basic security features” makes it easy for fake currency to gain circulation. The dearth of close-circuit television cameras, one-time combination locking combinations and unsecured ATMs allow cash loaders to introduce FCIN without any monitoring. A string of cases of fake currency recovery from various parts of the country, including notes ‘issued’ by ‘Children’s Bank of India’, are case in point.

Failure to Target Income Generation
The most stark shortcoming of the security measure is that it fails to target the income generation mechanisms employed by militant organisations and the nexus between them, illicit trade, corruption and criminals. Narco trade, for example, makes its way from India’s western and eastern borders and is closely linked with
terrorist activities. All across the globe, drugs have played an important role in funding terrorism and other violent activities. Afghanistan’s opium trade is instrumental in ensuring its survival while drug trade in Latin America has long fuelled violence in the region. In 2014, police arrested Khurshid Alan, a constable, who was allegedly delivering 22 pounds of heroin. It was later found that his supplier was a senior commander of Hizbul Mujahideen, based in the Pakistani city of Abottabad. In June 2015, an Indian farmer was caught transporting 110 pounds of heroin in hollowed out logs; narco terrorism finds facilitators from all walks of life.

It would be foolhardy to believe that one policy can single handedly target and end terrorism and other forms of violence. Nevertheless, that is the impression that the government has been giving in an attempt to defend its policy decision. Yet, the point remains that without attacking sources of income generation, the move will prove to be nothing more than a band-aid while trying to fight a tumorous growth. In short, a superficial attempt carried out at an enormously huge cost to the exchequer.

Closely related to the existence of terror outfits are thriving criminal networks. Routes used by criminals to traffic humans, illicit arms and drugs are often also exploited by terrorists. The attack in both Gurdaspur and Pathankot in Punjab, have been closely linked to drug trafficking in the State—70 per cent of youth in Punjab and close to 64 per cent in Gurdaspur are drug addicts. In eastern India, Naxals have been known to demand protection money from illicit arms dealers and manufacturers (Munger in Bihar is a hub of illicit arms industry), which, in turn, goes into carrying out militant activities.

The nexus between militants, criminals, politicians and power brokers further complicates the issue of security. To ensure that illicit trade can carry on without many hindrances requires patronage of those who are responsible for law and order, be it border and custom officials, transport authorities, local police, forest officials or politicians.

Kiren Rijiju, Minister of state for Home Affairs, recently informed Parliament that 68 members of various security forces have been arrested since 2014 for alleged involvement in drug trafficking. While the policy may or may not have been able to tackle black money (given the high value of deposits made up till December 31, 2016), it has created only temporary roadblocks for various terrorist and militant organisations.

Changing Terror Tactics
THE changing terror tactics and landscape further complicates the already entangled web of security, not only in India but across the world. The increase in the number of ‘lone wolf’ attacks ensures that terrorists no longer need to rely on large organisations, sleeper cells or even big doles of cash to carry out attacks. Ramming a truck in a vibrant market or simply stabbing a few people while screaming out a political message are enough to instigate fear and make it to the front pages of newspapers around the globe. Self-radicalised individuals may pledge allegiance to groups like the Islamic State (IS) on their Facebook walls and open fire at people in a club. While one may raise questions whether such individuals were really a part of a terrorist organisation, what remains unquestionable is that they are successful in posing a security threat and easily spread fear, a primary aim of terrorism.

Despite the positive intentions of the policy, the focus of demonetisation and its impact on the country’s security is exceedingly myopic. While it attempts to target fake currency notes and black money in the system, it is bound to have a very limited and short term impact on the sources of terror financing and its enabling actors

Additionally, terror groups are turning to the online realm to carry out their attacks, be it by spreading propaganda via social media platforms, hacking government websites or sharing well-produced movies. In such a day and age, the Indian government’s attempt to push the country towards digital economy in the aftermath of ‘demonetisation’ can also have negative repercussions. While countries like China and Pakistan have stepped up their cyber-warfare capabilities, India in 2016 witnessed the hacking of several Indian banks, leaving millions of bank accounts compromised.

Conclusion
Demonetisation is a radical monetary step which is usually resorted to by failed economies or whenever there is hyper inflation.

While ‘demonetisation’ will deal a severe blow to India’s black market, inflation and real estate, terrorism-which is cheap and can be funded by kosher resources-will face nothing but short term hurdles. In order to safeguard the country’s security interests, the government will need to tackle the issue from numerous angles, especially when the cost of carrying out terrorist attacks has become so low. We must also not forget that the counterfeiters will now get to work on the new 500/2000 rupee notes, while India will not resort to de-monetisation in the near future.

It is interesting to note that this was not the first time the GoI has gone for the demonetisation of high-value currency. It was first implemented in 1946 when the RBI demonetised the then circulated Rs. 1,000 and Rs. 10,000 notes. The government then introduced Rs. 1,000, Rs. 5,000 and Rs. 10,000 denomination banknotes in a fresh avatar eight years later in 1954 before the Morarji Desai government demonetised these notes in 1978.gfiles end logo


VOL. 11 | ISSUE 3| JUNE 2017

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