Will Modi’s demonetisation curb terror financing?

Ever since the National Democratic Alliance (NDA) government demonetised notes of Rs 1000 and Rs 500, several militant groups active in Jammu and Kashmir (J&K) and North East have been on the back foot. In a televised speech addressed to the nation on November 8, Prime Minister Narendra Modi announced demonetisation of high-value currency notes. The NDA government leaders have reasoned that the demonetisation measures are aimed at dismantling the syndicates using fake Indian currency notes (FICN) for terror financing. They have emphasised that such steps will have a crippling effect on terror funding in J&K, North Eastern region and Naxalite hit areas.

The government decided to take Rs 1000 and Rs 500 notes out of circulation after the intelligence reports had revealed the large scale use of these notes in the form of FICN. One of the major reasons behind the government's move is to control the inflow of FICN, thereby choking the sources of terror financing. A number of ministers of Modi-led government said the decision to demonetise high-denomination notes is indispensable in the interest of national security and economy. Over the years, Pakistan's both state and non-state actors have been relentlessly trying to destabilise India's economy by pumping FICN into the country.

Recovery of fake currency notes

The union government was worried over the debilitating impact of the fake currency notes on a fast growing economy like India. According to a study conducted by Kolkata-based Indian Statistical Institute in 2015, at any given point of time, there were at least Rs 400 crore fake notes in circulation in the economy. The study also pointed out that Rs 70 crore counterfeit notes are pushed to the economy every year.

There is no accurate estimate of the volume of fake notes in circulation even though various government agencies have their own assessment based on recoveries made by them. The National Crime Records Bureau (NCRB) said different law enforcement agencies confiscated 1, 78,022 pieces of fake Rs 1000 notes and 2, 99, 524 pieces of Rs 500 notes in 2015. Reports suggest that among the fake notes recovered from 2011 to 2015, the largest had been the denomination of Rs 500. Moreover, the number of fake notes of the denomination of Rs 1000 and Rs 500 are higher than those of smaller denominations such as Rs 100 and Rs 50. It was also find out that in more than 95% cases, fake Rs 500 notes recovered by the law enforcement agencies were of Pakistani origin.

Conduit of FICN

The NDA government claims that Pakistan has developed a "self-sustaining criminal network in South and Southeast Asian region" for pushing FICN to India. The National Investigation Agency (NIA) probe into the recent Pakistan-sponsored jihadi attacks in India exposed among others production, circulation and smuggling of high quality FICN and use of such notes for terror financing. For many years, Pakistan has been printing FICN at its government press in Quetta and its security press in Karachi.

There are several routes through by which Pakistan's notorious spy agency Inter-Services Intelligence (ISI) pumps the FICN into India. They include the frontier along J&K and through the country's porous borders with Nepal and Bangladesh. The security agencies maintain that in the recent years, Pakistan had been pumping FICN mainly through the India-Bangladesh borders. Senior security officials said that in 90% of the cases, counterfeit notes enter the country through the land route from Bangladesh. After production in Pakistan, such notes reach Bangladesh through air and sea routes. Some organised groups then pump the money into India through the porous India-Bangladesh borders.

The menace of FICN has reached alarming proportion. Reports say fake notes are circulated through a multi-layered network of hawala operators that are closely associated with gambling and smuggling of arms, ammunition and drugs. A large segment of profit generated from these illicit activities is used for terror financing. Terrorist groups also receive huge donations which are transferred through hawala operators.

Impact of demonetisation on militants' activities

The investigating agencies and anti-terror bodies engaged in curbing FICN have appreciated the recent demonetisation move as they believe that it would severely affect crime like terror financing especially in J&K and North East. The immediate effect will be felt by those who are involved in illegal financial transactions. Most of the jihadi outfits, including Hizb-ul-Mujahideen collect donations in Pakistan and then send the money to J&K through hawala network. The security agencies think that demonetisation has made the major sponsors of terrorism based in Pakistan inoperative at least for some time.

Experts maintain that the new currency notes with sophisticated features are almost impossible to replicate. After the government's November 8 decision to discontinue notes of Rs 1000 and Rs 500, Pakistan will be compelled to stop the production of FICN. According to senior security officials, for syndicates flourishing on FICN racket, the volume of return will come down significantly. It will also be a hard task for the syndicates to transport large quantity of cash since the 500 and 1000 rupee notes have been taken out of circulation.

Furthermore, the cost of manufacturing huge quantity of FICN with highest denomination of Rs 100 would hurt the fake currency racketeers financially. The cash possessed by the militant groups in the form of Rs 1000 and Rs 500 notes has become useless after the government's move. The terrorist outfits will also find it difficult to carry business using 100 rupee notes because of the logistical problems involved in the process.

Effect on militancy in North East

Demonetisation has seriously affected militants' activities in North East. Intelligence inputs indicate that the North Eastern insurgent groups together receive around Rs 400 crore annually through various illicit means. The top leaders of militant outfits transfer illegal money through hawala route to their cadres operating in North East from their bases in Myanmar's Sagaing division under the control of S S Khaplang-led National Socialist Council of Nagalim or NSCN (K).

The North Eastern militant groups also raise funds through ransom kidnapping and extortion and by levying taxes on common people. But with demonetisation, such cases have been reduced considerably due to the absence of cash inflow. Besides, shortage of cash has made the hawala operators virtually immobile. Numerous methods, including direct use of FICN for carrying out illicit activities have badly hit following the discontinuation of high-value currency notes.

Intelligence agencies say the North Eastern militant outfits receive huge funds from FICN trade. The region's most important state Assam has witnessed a sharp rise in the circulation of FICN in the recent months. Reports say during the first six months of this year, the state police seized at least Rs 22, 04,350 worth FICN which is much higher than the police have recovered in the whole year earlier. From 2010 to June 2016, the total seizure of FICN in Assam was worth about Rs 1.15 crore.

Pakistan has been pumping FICN through the North East region using Guwahati as their transit point. But Assam police have failed to contain the problem even after intensifying counter-insurgency operations throughout the state. The failure of the Assam police can be gauged from the fact that out of total 352 cases registered against the FICN pedlars since 2010 till June this year, only 6 persons were convicted during this period. Reports say during the same period, 388 persons were apprehended across the state, while Assam police prepared charge sheets in only 189 cases.

Senior police officials said their options are limited in tackling the menace since it is operated from foreign soil. They also admitted that state forces' focus have been on countering insurgency and ethnic clashes rather than blocking the sources of terror funding. It is expected that Sarbananda Sonowal-led government will soon initiate measures to address the problem of terror financing in Assam, which also faces jihadi threats unlike other North Eastern states.

Militants' activities in North East: Post-demonetisation

The North Eastern militant groups suffered a severe blow due to their inability to use the existing stock of big currency notes. In order to overcome this, militants have adopted coercive methods to exchange their old notes. Local reports suggest that 10-12 militants belonging to NSCN (K), United Liberation Front of Asom (Independent) or ULFA (I) and some outfits from Manipur recently forced the headman of a village in Arunachal Pradesh's Changlang district bordering Myanmar to exchange notes worth Rs 5-5 lakhs for them in banks at gunpoint. The cash crisis resulted from demonetisation has surprised the militant groups which are now venting their frustration and anger on the innocent villagers.

Similar incidents have also been reported from other areas of North East. The militant outfits are making frenetic efforts to exchange old notes defying the banking regulation imposed by the government after November 8. Assam's key militant group ULFA (I) is trying hard to exchange old Rs 1000 and Rs 500 notes through local businessmen. Recently, a petroleum trader was arrested in Sivsagar district when he attempted to exchange money on behalf of ULFA (I).

Taking advantage of the porous inter-state borders with Nagaland and Arunachal, the Myanmar-based militants have sneaked into the bordering areas and been making desperate attempts to exchange their old currency notes as Income Tax Department is not closely monitoring banking transactions in the hill states which are exempted from paying Income Tax. In an incident on November 18, two linkmen of Garo National Liberation Army (GNLA) were arrested in East Garo Hills district of Meghalaya while they were trying to convert around Rs 35 lakhs. In another incident, some armed cadres of NSCN (Issak-Muivah) were caught in Manipur when they were trying to exchange old currency notes worth Rs 44 lakh.

Government's anti-terror financing efforts

The union government has taken a number of measures to combat terror financing and money laundering. A special FICN Coordination Group (FCORD) was formed by the Ministry of Home Affairs (MHA) to share intelligence among various state and national security agencies to combat the fake currency rackets. The government has also set up a Terror Funding and Fake Currency Cell (TFFC) in the NIA to investigate terror financing and fake currency cases.

During Prime Minister Modi's landmark visit to Dhaka in June 2015, a memorandum of understanding (MoU) was signed between India and Bangladesh to prevent smuggling and circulation of fake currency notes across the international border. In addition to these, the government created a Combating Financing of Terrorism Cell (CFT Cell) in the MHA to coordinate with the Financial Action Task Force (FATF), an inter-governmental global mechanism dealing with anti-money laundering and CFT issues.

Challenges ahead

Countering terror financing has been a challenging task for the successive governments at the Centre. The security agencies noted that despite demonetisation of high-value currency notes, smuggling in arms and drugs is continuing in the border areas. They also have not ruled out the possibility of militants resorting to arms deals using US dollars. It is a matter of fact that the demonetisation measures have not make much inroads into the illicit financial transactions across the international borders.

Experts say it could be difficult to replicate the new currency notes but illegal money transfer will persist. Pakistan's ISI and jihadi outfits will find out innovative methods to counter the security measures adopted while printing new currency notes. It has also been pointed out that terror financing will continue as ISI is likely to identify the technology used to produce new currency notes and come up with its own to flood the market again.