Why Demonetisation Could Fail to Make a Dent on Terror Financing

Although demonetisation will deal a severe blow to the black economy, corruption, inflated pricing and tax evasion, terrorism – which is cheap and can be funded by kosher resources – will remain largely unaffected.


Indian currency notes. Credit: PTI

The changeover of high denomination notes in India is arguably a major strategic step that has been lauded by many Indians. The gaping chasm between our legal and illegal economy had reached an alarming state where the anti-national elements ranging from corrupt officials and tax evaders to state sponsored terrorists had a free run through India’s security apparatuses. Having said that, the ingenuity of the criminal, terrorist and inimical countries shouldn’t be underestimated, and the government must go a step further in order to leverage the full potential of this step.

There are four essential elements needed by terrorists and organised crime groups to achieve its objectives – mobility, logistic bases, communications and financing. In a developing country like ours, only the communication aspect is within the surveillance capability of law enforcement agencies and it is fairly easy to obtain and leverage the remaining three without detection.

To understand why demonetisation will not affect terror financing, it is important to detach emotions associated with terror attacks and understand that terror is nothing more than an instrument of war leveraged by a ‘weaker’ adversary against a conventionally stronger one.

The strategic intent of terrorism is not to kill people; instead it is to compel and influence far beyond the capability of the weaker adversary.

So when Pakistan unleashes terrorism in say Kashmir, they compel the deployment of half the Indian army in the Valley. When the ISI attacks Mumbai, they compel every hotel, mall, public place to be guarded, thus forcing India to divert billions of dollars in funds for development into what essentially is non-productive expenditure. Terror is not about racking up body bags; instead it is about the return on investment.

Terror financing falls into three categories. ‘Tactical terror financing’ is the money needed to mount specific operations. This aspect would remain unaffected by the demonetisation of Rs 500 and Rs 1000 notes for the simple reason that terror operations are incredibly cheap and can be funded by kosher resources. For instance, the entire cost of 9/11 attacks was estimated to be $300,000-400,000 and in the context of the direct and indirect damages it inflicted, that was an incredible return on investment.

Similarly, an attack like 26/11 in Mumbai can be launched for less than Rs 40 lakhs (including the bounty that was supposedly paid to the families of the ten terrorists). Again the return of investment was massive.

‘Operational terror financing’ includes funds required for running a low-intensity campaign like the ISI-sponsored ‘thousand cuts’ strategy in Kashmir. More than tactical financing, it is operational financing that is well within the capability of state-sponsored terrorism. Equipping a few hundred terrorists with assault rifles, explosives, communication tools and blood money is well under a few score crores. In the case of inland terror groups like the Naxals, much of the funding is obtained through extortion from the local populace.

Even one of the world’s most powerful terror groups numbering several thousand cadres – the LTTE – that kept the Sri Lankan and Indian armies at bay, had an operating budget of $300 million, which is barely 4% of Pakistan’s defence budget. All terror outfits operating in Kashmir put together are a mere fraction of the LTTE, and while it is true that the ISI had been subsidising their operations using counterfeit currency, demonetisation per se will not put a dent on their lethality.

Damaging our economy by flooding counterfeit currency is the third strategic prong of Pakistan’s plan, and strictly speaking, while this is not a part of ‘terror financing’, (the correct nomenclature would be ‘economic warfare’) the demonetisation will disrupt it only for a brief period until the ISI replicates the new format of high denomination notes. Granted that the newer currency will be harder to replicate, but if Indian mints can make them, so can Pakistani. Additionally, they only need to make a near replica to pass the muster and not an exact copy.

Changing national currency is an extremely expensive exercise, so this is not a move that any government can implement frequently to purge out fake currency from its economy. Even the US – which has repeatedly faced this problem from organised crime and countries like Iran (which, ironically, was printing counterfeit dollars using the very mints gifted by the US to the Shah of Iran after his regime toppled) and North Korea – did not resort to currency changeover to resolve the problem.

Hence, even though demonetisation will undoubtedly deal a severe blow to the black economy, corruption, inflated pricing and tax evasion, terrorism per se will remain largely unaffected.

Demonetisation, however, will also exacerbate a new challenge as India will be nudged towards a cashless economy or more pragmatically, a ‘less cash’ economy. This entails a far higher reliance on digital and plastic money and in that lies a major vulnerability.

Less than a month ago, several leading and technologically proficient Indian banks were hacked into and millions of accounts were compromised. Even first world countries – which are decades ahead in terms of cyber security awareness, infrastructure and research funding – are struggling to fend off cyber threats. The innards of most Indian computing networks are ironically imported from China, and India has no meaningful capability to either substitute it with its own trusted electronics or assess the integrity of imported components.

Both China and Pakistan have invested heavily in their cyber offence capability for decades and this is an area that paradoxically for an ‘IT nation’ like ours has been our Achilles heel. The continued use of foreign email providers by thousands of government officials for official correspondence is a testimony to the deficiencies in our government’s capabilities and awareness when it comes to cyber security.

The resources that India has deployed to address the fifth dimension of war – the cyberspace – are woefully inadequate. Similarly, many of the processes that lay the foundation for electronic security such as indigenous manufacturing of chips and processors, the capability to audit malware within software and applications, user’s awareness of cyber threats, the integrity of processes like the KYC while opening accounts or obtaining mobile numbers, are still in its infancy.

A tidal shift from hard currency to digital money will need to be accompanied by an equally massive effort on securing the systems, educating millions of technology challenged users and setting up of cyber defence capabilities. Fortunately, the funds for that are now available in the form of penalties which the demonetisation will unlock. All that is needed now is a government mindshare and implementation on a war footing. And there is perhaps poetic justice in the fact that some of the ill-gotten black money will go back into securing the white economy of digital India.

Raghu Raman is founding CEO of NATGRID and president at Reliance Industries. He tweets @captraman and views expressed are personal.