Terrorist Financing through Money Laundering – a Threat to

National Security

Vijay Kumar Singh

Deputy Director (Law), Competition Commission of India

Paper presented at the UGC Sponsored National Seminar on “National Security, Terrorism and Human
Rights” organized by Department of Law, Dr. Ambedkar College Deekshabhoomi on 19—20 February, 2011

Disclaimer: The views expressed in this article are my own, and in no way refers to the views of the Competition
Commission of India or Government of India. The views may not be reproduced by any medium without the
disclaimer

Abstract: NHRC considers “terrorism as a mad violator of human rights.”

Terrorism involves a two-way violation and concerns both its victims and
perpetrators; needless to say, a threat to national security as well. While
discussing terrorism and human rights, one misses an important aspect
which relates to the fuel for terrorism, i.e. money. This money for terrorist
activities comes from legal as well as illegal sources, the latter commonly
referred to as money laundering. The concept of terrorist financing hit the
board with the World Trade Center attack in America and thereafter a lot
of research has been done in this area under the head “Combating the
Financing of Terrorism (CFT)”. Often Anti-Money Laundering (AML)
and CFT is referred together there is a subtle difference between them.
AML/CFT regime in India is relatively new and with its strong growing
economy and demography faces a challenge in terms of handling
AML/CFT activities. The present paper would begin with understanding
the basic concepts and their inter-linkages and would lead to a further
discussion on the challenges in terms of CFT administration as pointed out
by FATF in its recent observance paper in July 2010. This paper draws an
intuition from an earlier paper published by the author on Money
Laundering as well as the recent controversies surrounding “black money”
abroad and their possible use in financing of terrorism. Paper aims at
opening up issues to ponder upon in national interest about national
security and protection of human rights of billions of citizens.

Electronic copy available at: https://ssrn.com/abstract=2973695

 Money is like fire, an element as little troubled by moralizing as earth, air and
water. Men can employ it as a tool or they can dance around it as if it were the
incarnation of a god. Money votes socialist or monarchist, finds a profit in
pornography or translations from the Bible, commissions Rembrandt and
underwrites the technology of Auschwitz. It acquires its meaning from the uses to
which it is put.i

One of the dirtiest uses of money is financing terrorism. Terrorism is an evil which affects each
and everybody. Now and then we can find terrorist attacks being made by terrorists. These
attacks definitely cannot be done without the help of moneyii. The link between money and
terrorism is established and is referred to as “life-line of terrorism”
3
. Three years since 9/11 it has become apparent that economics, not politics or ideology, is the
engine of the armed struggle. This is the unexpected and disconcerting truth unveiled by an
economic analysis of five decades of modern terrorism4.

The Concept: “Terrorist Financing” as a concept saw the limelight with 9/11 attack in USA5.
In response to this US passed the PATROIT Act6 to ensure that both combating the financing of
terrorism (CFT) and anti-money laundering (AML) was given adequate focus by US financing
institutions7. United Nations Security Council passed its resolution8 1373 of 2001 unequivocally
condemning the terrorist attacks and determination to prevent such acts. The resolution seeks to
criminalize terrorist financing which it defines as follows:
“wilful provision or collection, by any means, directly or indirectly, of funds by their
nationals or in their territories with the intention that the funds should be used, or in the
knowledge that they are to be used, in order to carry out terrorist acts.”

Financial Action Task Force (FATF)9 gives a comprehensive definition of terrorist financing as:
The term terrorist financing includes the financing of terrorist acts, and of terrorists and
terrorist organisations…. Terrorist financing offences should extend to any person who
willfully provides or collects funds by any means, directly or indirectly, with the
unlawful intention that they should be used or in the knowledge that they are to be used,

Electronic copy available at: https://ssrn.com/abstract=2973695

 in full or in part: (a) to carry out a terrorist act(s); (b) by a terrorist organisation; or (c) by
an individual terrorist.
Thus, one can say that terrorist financing is essentially the collection and/or use of funds to
accomplish or support terrorist acts or to support terrorist organizations10.

Money Laundering and Terrorist Financing: Money Laundering is the term used to describe
the use of the financial system by criminals to hide the source of funds gained from illegal
activity such as drug trafficking, bribery, extortion, embezzlement, theft or other criminal
activity, as the criminals try to make their ill gotten gains appear genuine. In effect, Money
Laundering is about turning dirty money into clean money11. There is a subtle but very
important difference between terrorist financing and money laundering activities. Terrorist
Financing can be the opposite of this – clean money (often in legitimate donations to charities)
misdirected by account holders to their criminal colleagues in what appear to be legitimate
activities (again, often charities but it can be any form of institution). And it need only take a
small amount of money12 to launch such an attack, so defences need to be strong13. Terrorists
have shown adaptability and opportunism in meeting their funding requirements. Terrorist
organizations raise funding from legitimate sources, including the abuse of charitable entities or
legitimate businesses or self-financing by the terrorists themselves14.

However, under Money Laundering, terrorists derive funding from a variety of criminal activities
ranging in scale and sophistication from low-level crime to organized fraud or narcotics
smuggling, or from state sponsors and activities in failed states and other safe havens. Terrorists
use a wide variety of methods to move money within and between organizations, including the
financial sector, the physical movement of cash by couriers, and the movement of goods through
the trade system. Charities and alternative remittance systems have also been used to disguise
terrorist movement of funds15.

Thus due to the extremely opportunist ideology of the terrorists, there is no fit mode of raising
and moving the funds, however, it is important to note that large source of terrorist funding
comes from money laundering, because of their vulnerability from the law enforcement agency.
Terrorists use techniques like those of money launderers to evade authorities' attention and to
protect the identity of their sponsors and of the ultimate beneficiaries of the funds. However,
financial transactions associated with terrorist financing tend to be in smaller amounts than is the
case with money laundering, and when terrorists raise funds from legitimate sources, the
detection and tracking of these funds becomes more difficult16.

Threat to National Security: National Security plays a very important role in controlling the
terrorist activities. It is not only the question of failed states or other safe havens, even a country
having an inconsistent policy in dealing with the terrorist activities, especially terrorist financing,
would be vulnerable to national security and in turn international peace and security. It is a well
recognized fact that the terrorist activities would not have been possible unless the financial
system was weak enough to let easy money flow to the terrorist as a result of masking.

Indian Efforts on CFT: The concept of “terrorist financing” has got some place in the recent
proposed amendment to the Prevention of Money Laundering Bill 2008 by introduction of
“offences of cross border implications17”. The Bill introduces a new category of offence that has
cross-border implications for fighting terrorism. This particular provision gives the Indian anti
money-laundering legislation an extraterritorial exposure. Now under this provision a person
who is presently outside India and conducts in such a way that it constitutes an offence at that
place and which would have also been an offence under one of the Parts of the schedule referred
to above and remits such proceeds to India OR commits an offence in India under one of the
Parts referred to above and transfers the proceeds or part thereof outside India commits an
offence of Cross-Border Implication. Thus, now cross-border illegal proceeds can be put under
the scanner of anti-money laundering legislation in India.

Financial Intelligence Unit – India (FIU-IND) was set by the Government of India18 as the
central national agency responsible for receiving, processing, analyzing and disseminating
information relating to suspect financial transactions. FIU-IND is also responsible for
coordinating and strengthening efforts of national and international intelligence, investigation
and enforcement agencies in pursuing the global efforts against money laundering and related
crimes. FIU-IND is an independent body reporting directly to the Economic Intelligence Council
(EIC) headed by the Finance Minister19.
Further, the preamble of National Investigative Agency Act 2008 makes it possible for the
investigating agencies to undertake investigations into the “terrorist financing” activities20.
These efforts have been lauded by the International Monetary Fund in its report “India:
Observance of Standards and Codes FATF Recommendations for Anti-Money Laundering and
Combating the Financing of Terrorism.21”

Issues for Consideration: The IMF report which was given on July 30, 2010, however raises
several issues for consideration by India and questions its preparedness to AML/CFT:
 Law but where is the enforcement – “Effectiveness concerns are primarily raised by the
total absence of any ML convictions, even though the NDPS Act has been in effect since
2 October 2001 and the PMLA since 1 July 2005. At the time of the on-site visit only six
prosecutions were underway, with the first proceedings starting in 2008.”
 Know Where the Problem is – India has been subject to many terrorist attacks and a
potential target for terrorist groups. Lack of data on terrorist operations have been a
concern. Moreover, negligent prosecutions in CFT cases indicate a leeway in the system.
 Effective Financial Supervision – It has been found by FATF that “supervisory regime
for financial institutions is generally sound, but its effectiveness with regard to
AML/CFT has not yet been sufficiently demonstrated. In addition, the sanctions that
supervisors have applied for AML/CFT deficiencies cannot be considered to be effective,
dissuasive or proportionate.”
 An Eye on Designated Non-Financial Businesses and Professions – DNFBPs conducting
business in India include casinos, lawyers, real estate agents, accountants, company secretaries,
gold dealers, and dealers in precious metals and stones are not subject to the PMLA and are
not regulated and supervised for AML/CFT purposes.
 Non-Profit Organizations – Except under the Income Tax Act and the Foreign Contribution
(Regulation) Act (FCRA), the NPO sector is subject to limited or no monitoring and supervision,
but the NPOs registered under these Acts only account for a small number of entities within the
sector.
 Cooperation is the Key – Money laundering and terrorist financing are complex crimes
and, for this reason, multiple national agencies must be involved in the various aspects of
 preventing, detecting, and prosecuting them22. This calls for a better international
cooperation too. On this front, India has been effective as put by FATF.

Conclusion:
Combating Terrorism Financing is a dynamic process because the criminals who launder money
are continuously seeking new ways to achieve their illegal ends. Moreover, it has become
evident to the FATF through its regular typologies exercises that as its members have
strengthened their systems to combat money laundering the criminals have sought to exploit
weaknesses in other jurisdictions to continue their laundering activities.

Disrupting and dismantling terrorist financing networks is essential to combat terrorism.

Terrorist organizations’ 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 (i) Damaging morale, leadership and legitimacy within
a network and (ii) Forcing terrorist groups to shift activity into areas where they are more
vulnerable, including areas that they would otherwise avoid23.

India has put in a substantial effort towards AML activities; the need is to focus on CFT realizing
the subtle difference these two concepts bear. A broader approach may not help us meet the
desired goal of terror free world.

Endnotes:

i
Lewis H. Lapham (b. 1935), U.S. essayist, editor. Money and Class in America, ch. 8 (1988), the Columbia
Dictionary of Quotations.
ii
Estimated direct attack cost in Bali Bombings is estimated at USD 50,000. source – Financial Action Task Force
Report on Terrorist Financing, 29th February 2008, available at <http://www.fatf-
gafi.org/dataoecd/28/31/40196357.pdf> last accessed on November 14, 2008
3
US Secretary of Defense Colin Powell
4
Money and Terrorism, available at http://english.safe-democracy.org/contribute/money-and-terrorism.html
accessed on February 1, 2010. Also see Loretta Napoleoni, Modern Jihad, tracing the dollars behind the terror
networks
5
The concept of financing of terrorists was always a concern for international community and is evident from the
UN’s International Convention for the Suppression of the Financing of Terrorism which was adopted by the General
Assembly of the United Nations in resolution 54/109 of 9 December 1999. The resolution under Article 2.1. states
that any person commits an offence within the meaning of this Convention if that person by any means, directly or
indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the
knowledge that they are to be used, in full or in part, in order to carry out: (a) An act which constitutes an offence
within the scope of and as defined in one of the treaties listed in the annex;4 or (b) Any other act intended to cause
death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a
situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to
compel a government or an international organization to do or to abstain from doing any act.” Resolution available
at http://www.un.org/law/cod/finterr.htm
6
The USA PATRIOT Act (commonly known as the "Patriot Act") is an Act of the U.S. Congress that was signed
into law by President George W. Bush on October 26, 2001. The title of the Act is a contrived three letter initialism
(USA) preceding a seven letter acronym (PATRIOT), which in combination stand for Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. Title III of the
Act (International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001) specifically deals with
AML/CFT.
7
Terrorist Financing, International Center for Political Violence and Terrorism Research Strategic Counter
Terrorism: Terrorist Financing Response Series, January 2007.
8
Available at http://daccess-dds-ny.un.org/doc/UNDOC/GEN/N01/557/43/PDF/N0155743.pdf?OpenElement
accessed on February 4, 2011.
9
The Interpretative Notes to the Special Recommendations (SR) on Terrorist Financing (TF), Interpretative Note to
Special Recommendation II: Criminalising the financing of terrorism and associated money laundering, paras. 2, 3
available at http://www.fatf-gafi.org/dataoecd/8/17/34849466.pdf last accessed on February 4, 2011
10
Air India Flight 182, A Canadian Tragedy, Volume Five, Terrorist Financing, available at http://epe.lac-
bac.gc.ca/100/206/301/pco-bcp/commissions/air_india/2010-07-23/www.majorcomm.ca/en/reports/finalreport
/volume5/volume5.pdf > accessed on February 4, 201.
11
For a detailed analysis on money laundering see Singh, Vijay Kumar, “Controlling Money Laundering in India –
Problems and Perspectives”, 2009, available at http://www.igidr.ac.in/~money/Singh_Vijay.pdf
12
In July 2006 German authorities found improvised explosive in a suitcase which would not have cost more than
EUR 250. FATF OECD paper , see note 14
13
See http://www.terroristfinancing.net/
14
FATF/OECD paper on Terrorist Financing, 29 February 2008, available at http://www.fatf-
gafi.org/dataoecd/28/43/40285899.pdf accessed on February 4, 2010
15
Id.
16
http://www.fintrac.gc.ca/fintrac-canafe/definitions/terrorist-terroriste-eng.asp
17
Section 2(1)(ra) of PML Bill 08 - Offences of Cross Border Implications means
(i) Any conduct by a person at a place outside India which constitutes an offence at that place and which would
have constituted an offence specified in Part A, Part B or Part C of the Schedule, had it been committed in India and
if such person remits the proceeds of such conduct or part thereof to India; or
(ii) Any offence specified in Part A, Part B or Part C of the Schedule which has been committed in India and the
proceed of the crime, or part thereof have been transferred to a place outside India or any attempt has been made to
transfer the proceeds of crime, or part thereof from India to a place outside India.
18
vide O.M. dated 18th November 2004
19
http://fiuindia.gov.in/about-overview.htm
20
An Act to constitute an investigation agency at the national level to investigate and prosecute offences affecting
the sovereignty, security and integrity of India, security of State, friendly relations with foreign States and offences
under Acts enacted to implement international treaties, agreements, conventions and resolutions of the United
Nations, its agencies and other international organisations and for matters connected therewith or incidental thereto
21
India faces money laundering, terrorist financing risk: IMF, available at
http://www.deccanherald.com/content/131960/india-faces-money-laundering-terrorist.html
22
Pierre-Laurent Chatain, et.al, Preventing Money Laundering and Terrorist Financing – A Practical Guide for Bank
Supervisors, World Bank, 2009
23
FATF/OECD paper see note 14