What scrapping Rs 500/1,000 notes means for countering terrorism

Modi's bold move will have far-reaching effects on the financing of terror due to its linkage with corruption and money laundering.

 |  6-minute read |   09-11-2016
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The surprising and unexpected news of withdrawal of currency notes of Rs 500 and 1,000 denominations came late November 8, with Prime Minister Narendra Modi taking on the mantle of making the announcement himself.

While the buzz remained centered around the impact it was likely to have on people who had large amounts of cash stashed away and businesses like real estate, the decision is likely to deal an equally severe blow to the financiers of terrorism.

The most obvious conclusion that can be drawn from the decision is the redundancy of counterfeit currency or fake Indian currency notes (FICN) as has also been indicated by the prime minister. The decision will render the existing FICN already within India useless. This will give a dual advantage against Pakistan-sponsored and funded terrorism.

First, it limits the impact of counterfeit notes on the economy and second, it curtails the funding of terrorism being done through circulation of FICN and sale in India by Pakistani-sponsored agents and middlemen.

It would be useful to recollect that in 2014 a special sessions court had directly indicted Pakistan for its involvement in the production of FICN in government currency printing presses, as also for circulating it in India.

However, the decision is likely to have even more far-reaching effects on the financing of terrorism as a result of its direct and indirect linkage with corruption, crime, money laundering and reliance on the cash economy for its sustenance. This can best be illustrated through an analysis of each of these factors and its impact on the financing of terrorism.

Corruption is the most debilitating and crippling factor that impacts the financing of terrorism. It allows the creation of a vulnerable financial system exploited by crime, which finds an outlet through money laundering, with an aim of cleaning the dirty money that criminals generate.

The financing of terrorism exploits these very existing channels that are used for cleaning crime proceeds to transfer money both within and outside the country. As an example, the property business has traditionally been exploited for parking black money.

hawalabd_110916024255.jpg The financing of terrorism takes place through both external and internal sources. (Photo: Reuters) 

Given the clout of most individuals involved in this activity on an industrial scale, an environment of permissiveness has facilitated these actions. Since electronic linkages can be established through the movement of clean money paid through banking channels, a substantial percentage exchanges hands in cash.

This creates a cesspool of floating money belonging to both exploited owners wanting to buy property for end use and criminals rotating their ill-gotten wealth.

This very system has been exploited for funding terrorism by easily accessing wealth from abroad as well as money extorted from people within the country and parking it in property. This creates a mutually beneficial linkage between criminals, property dealers, political leaders collecting money in cash, money launderers and the financiers of terrorism.

This symbiotic linkage continues to support such malpractices effectively negating any attempt at cleaning the system. The step taken by the government will go a long way in crippling the existing collection of black money and criminal proceeds.

The financing of terrorism takes place through both external and internal sources. Externally, this emanates from state funding by Pakistan, donations from non-governmental organisations (NGOs) or individuals, circulation of FICN, money raised through the sale of narcotics or protection money for allowing it to be traded.

The internal sources include extortion or so-called taxation, criminal acts like bank robberies, exploitation of designated non-financial businesses and professions (DNFBPs) like property dealers, gem traders, lawyers etc. and NGOs.

The money transfer mechanism available to move money from the sources to the recipient primarily takes place through four methods: cash; hawala; legal transfers like banking and trade based transfers. Amongst these, in the Indian context, it is cash and hawala that form the backbone for transfer of money to fund terrorism.

In case of cash transfers, including FICN, it involves the physical movement of money. In the past this has been done through a variety of means to include the use of human couriers coming by air, rail or road transport.

It has also been transferred as part of concealed packages on a larger scale. Unlike cash movement, hawala does not involve the transfer of cash, but instead only its value.

As an illustration, an agent in Dubai will receive an amount X from a client A. He will instruct his counterpart Y in Delhi to hand over the same to client B. Both the agents will take their commission and without the physical movement of money, the transfer would have been completed. At the end of a certain period, both agents will conduct book balancing to adjust the difference.

The means employed for money transfer indicate that each of the options are likely to be affected substantially by the decision to withdraw notes of 500 and 1,000 denomination.

First, the production of FICN will have to undergo a complete procedural shift within Pakistan thereby stalling the existing process. Second, the existing FICN in the market and with middlemen becomes redundant.

Third, the cash that had been moved by human couriers and had been converted into Indian currency cannot be used for financing terrorism any longer. Fourth, the money collected by Indian insurgent groups through extortion from the local population, cannot be exchanged for the new currency from a bank making it useless pieces of paper.

Fifth, the money raised through narcotics or criminal acts can no longer be used to fuel terrorism. Sixth, the existing currency with hawala operators in India cannot be exchanged in banks, thereby dealing a severe blow to their operations. Seventh, legal practitioners, gem traders and property dealers who had accumulated amounts in cash funnelled and cleaned for criminals and financiers of terrorism will be left with a pile of useless currency.

While the financing of terrorism is likely to be affected adversely in the short term, it is the long term cleansing of the threat that must remain the government’s target.

This must be addressed through reducing the role of a cash based economy, facilitating a transparent and efficient business and economic environment that encourages legal transactions, enhancing the incentive to use plastic money, scrutiny of money being received through foreign funding, transparency of political funding, ensuring accountability of NGOs in India, bringing accountability and transparency in cash intensive businesses like property trade amongst others.

The next few days will also test the preparedness of the government and the banking system, wherein, even as criminal proceeds and terror funds are weeded out to a degree, the common man should be able to manage the transition with least inconvenience.

This is critical as the fight against corruption, black money, money laundering and terrorism can only be won through the support of the common man on the street.

Also read: Rs 2,000 strikes gold, thanks to Modi

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Colonel Vivek Chadha Colonel Vivek Chadha

Colonel Vivek Chadha (Retd) is a research fellow at the Institute for Defence Studies and Analyses and author of Lifeblood of Terrorism: Countering Terrorism Finance.

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