Money Laundering & Terror Financing

Over the decades, India (as well as other parts of world) has witnessed numerous terror strikes and still remains a potential target for terror related activities. These attacks certainly cannot be carried out without the help of money. Financing is needed not just to fund specific terrorist operations, but also to meet the broader organizational costs of developing and maintaining a terror organization and to create an enabling environment necessary to sustain its activities. FATF (Financial Action Task Force ) highlights several requirements of terror organisations for which they require funding –

• The direct costs of terrorist attacks like procuring precursor materials necessary to stage specific attacks like vehicles, improvised bomb-making components, maps, surveillance material etc.
• Salaries / subsistence for its operatives and their dependent family members
• Recruitment & Training of operatives in terms of both ideological indoctrination and practical skills.
• Some terror groups also sustain Charitable organisations and Businesses to give their organisation a masquerade of legitimacy. Such organisations and businesses not just require funding but at times can also act as a source of funds for terror organisations.
• For terror organizations, often a sophisticated public relations and media operations component that sustains the ideology of terrorism requires significant funding. For example - the propaganda over the internet by ISIS to spread its ideology and increase the number of recruits.

Therefore, uprooting terror finance networks/channels creates a hostile environment for terrorism, constraining overall capabilities of terrorists and frustrating their ability to execute attacks.

The Role of Money Laundering

Since terror activities cannot be financed from legal sources of money, Money Laundering serves as an important mode of terrorism financing. Terrorists have shown adaptability and opportunism in meeting their funding requirements. Terrorist organizations raise funding from diverse sources, including the abuse of charitable entities or legitimate businesses or self-financing by the terrorists themselves. It is here that the nexus between terrorism and money laundering is evident –

• Exploitation of Charities - Charities or non-profit organisations possess characteristics that make them particularly attractive to terrorists or vulnerable to misuse for terrorist financing. They enjoy the public trust, have access to considerable sources of funds, and their activities are often cash-intensive. Furthermore, some charities have a global presence that provides a framework for national and international operations and financial transactions, often in or near areas most exposed to terrorist activity. Finally, charities are subject to significantly lighter regulatory requirements than financial institutions or publicly held corporate entities. Therefore, proceeds from such charitable institutions are often laundered to fund terror activities.
• Diversion from legitimate Businesses – Often terror organisations run legitimate businesses and profits/proceeds from such businesses are laundered to fund terror activities. Particular in these are cash intensive businesses like gambling houses/casinos etc. and businesses where it is difficult to keep a track of sales/services being offered.
• Criminal Activities - Terrorist use of criminal activity to raise funds ranges from low-level fraud to involvement in serious and organised crime such as arms trafficking, kidnap-for-ransom, extortion, racketeering etc.
• Drug Trafficking - Drug Trafficking is an attractive source of funds for terrorist groups, enabling them to raise large sums of money. For ex- Al Qaeda's one of the largest sources of fund is sale of Opium. Similarly, several terror outfits operating in East/South-east Asia utilize funds from trafficking of Cocaine from Golden Triangle. Investigations and intelligence have revealed direct links between various terrorist and drug trafficking organisations that frequently work together out of necessity or convenience and mutual benefit.
• Credit Card Fraud - There is a market for illegally obtained personal details, including credit card account numbers, as well as personal information such as the card holder’s full name, billing address, telephone number, start and expiry dates, the security number on the rear of the card, etc. This remains one of the most exploited markets for terror organisations.
• Cheque Book Fraud - Several cases have been identified in which a basic model of bank fraud has been applied to generate funds for terrorism. These cases involved bank accounts being opened using false identity documents and fraudulent deposits. Cheque books are then stockpiled; and when a large number have been accumulated, they are used to purchase goods from department stores costing under the amount that would trigger verification to ensure sufficient funds were available in the account. The goods are returned for a cash refund.
• Trade - Trade of merchandise and natural resources (like ISIS controlling Petroleum fields) are other sources of terror financing. As international trade today has grown several folds, thereby providing terrorist organisations the opportunity to transfer value and goods through seemingly legitimate trade flows. The proceeds from such activities are laundered off to terror organisations.

(As per a latest report by FATF, trade accounts of diamond business in India are being used to launder illegal funds and finance terror activities. As there are no set standards of diamond pricing in the country, agents are overvaluing the costly and prized gemstones for purposes of laundering and suspected financing.)

International Response

As per FATF, terrorist organisations' diverse requirement for financing creates a strong logic for seeking to disrupt terrorism by choking off funding flows to all terrorist-linked activities. Interdicting these flows can degrade the capability of terrorist groups over time, limiting their ability to launch attacks, increasing their operational costs and injecting risk and uncertainty into their operations, which can have tactical benefits, such as damaging morale, leadership and legitimacy within a network. Therefore, the steps that should or are being taken are –

• Preventing Terrorists from Raising, Moving, and Using Funds – Detecting terrorist involvement in otherwise legitimate financial activity requires financial institutions to implement the FATF standards through strong application of the KYC – (know your customer) principle and of customer due diligence (CDD) policies and procedures. These are also fundamental to the reporting of suspicious transactions that may indicate criminal activity supporting terrorism. To assist financial institutions in combating terrorist financing, jurisdictions must adopt certain measures. These include implementing targeted financial sanctions programmes, protecting vulnerable sectors including the charitable sector and money-service businesses, and encouraging effective reporting of suspicious activity.

• Targeted Financial Sanctions - FATF calls on countries to develop and implement targeted financial sanctions regimes that identify, freeze the assets of, and prohibit making funds available to designated terrorists and their support networks.
• Protecting Vulnerable Sectors - FATF lays out a framework that aims to protect the non-profit organisations/NGOs/charitable sector by ensuring it is not misused by terrorist organisations. The framework includes, supervision and monitoring of such institutions and international agreements to control their misuse.
• Suspicious Transaction Reporting - Financial information including that gathered from suspicious transaction reporting has a central role in identifying terrorist financing and the movement of terrorist funds through the financial system. Financial information alone may not be sufficient to identify terrorist financing activity. However, when combined with counter-terrorist intelligence drawn from surveillance of the range of terrorist activities and networks, financial information can be leveraged to provide financial institutions with a concrete indication of possible terrorist activity.
• Financial information - Through the development of internationally recognised AML and CFT (Anti Money Laundering and Combating Financing of Terror) standards, financial institutions and other designated non-financial entities have taken steps to know their customers and keep records.

India’s Response

India became FATF’s 34th Member in June 2010. As per the FATF procedure, every country has to give an Action Plan to bring their AML/CFT regime close to the compliance zone of the FATF. India also gave an Action Plan in June 2010 and followed up with Action Taken Report in October 2010 and in February 2011.

• In line with the FATF standards, RBI has introduced strict KYC norms for Banking related activities. On its part SEBI has also tweaked its KYC norms for market related transactions.
• The Unlawful Activities (Prevention) Act, 1967(UAPA) and the Prevention of Money laundering Act, 2002 (PMLA) are effective instrumentalities to combat offences relating to Terrorist Financing and Money laundering. The Unlawful Activities (Prevention) Act, 1967 has been strengthened by amendments in 2013 which inter-alia includes enlarging the scope of proceeds of terrorism to include any property intended to be used for terrorism
• A special Combating Financing of Terrorism (CFT) Cell has been created in the Ministry of Home Affairs in 2011, to coordinate with the Central Intelligence/Enforcement Agencies and the State Law Enforcement Agencies for an integrated approach to tackle the problem of terror funding.
• Also, a Terror Funding and Fake Currency Cell has been set up in the National Investigation Agency to investigate Terror Funding cases.
• Moving with FATF standards, FIU (Financial Intelligence Unit) India has been established to monitor suspicious financial transactions that could be related to terror finacing.
• SEBI is intensively cracking down on Shell Companies that could be involved in money laundering or generating resources for terror financing.
• For past several years, the government is cancelling the registration of NGOs which are not filing timely returns/reports under FCRA or Foreign Currency Regulation Act.
• Finally, the Narcotics Act of India is being implemented to curb the menace of drug trafficking. Also, the BSF and other border security agencies are keeping a special check on cash couriers and drug mules as often these are related to terror financing.
• India has reformed its AML/CFT standards as per standards set by FATF as well as Asia Pacific Group. In addition, recently India entered into an agreement with UAE to curb Money Laundering and Terror Financing.

What more could be done

• Jurisdictional Issues - There are concerns about the terrorist financing vulnerabilities associated with safe havens, failed states or state sponsors that create enabling environments or otherwise provide active support to terrorist organisations. Through international cooperation these issues need to be resolved.
• Enhanced Financial Intelligence - Financial information alone is not sufficient to effectively combat terrorism. However, when combined with counter-terrorist intelligence, financial information can greatly enhance a country’s ability to identify and intercept terrorist activity.
• Outreach to the private sector for implementing FATF guidelines effectively in close cooperation with the state agencies.
• Creating a better understanding of link between Money Laundering and Terror financing at the levels of state, institutions (public/private) and individuals.

By: Deepak Hooda