Terror financing

How terrorist organisations are financed

Terrorist finance flows through both illicit and licit channels. Illicit sources include narcotics (the Afghan heroin trade funds Pakistan-based groups), extortion and 'taxation' in conflict zones (Maoists collect levies from mining and tendu contractors), kidnapping for ransom, counterfeit currency and smuggling. Licit sources include charitable donations, zakat collections diverted through front NGOs, legitimate businesses, and state sponsorship — the most consequential for India, given Pakistan's documented support to LeT, JeM and Hizbul Mujahideen.

Movement methods matter as much as sources. Hawala — the informal value-transfer system based on trust among brokers — moves money across borders without records. Cash couriers, trade-based transfers, money mules, prepaid cards and, lately, cryptocurrencies and online wallets provide alternatives. The 26/11 attackers were financed through a mix of hawala and legitimate-appearing transfers; Pulwama's explosives procurement was funded through local collection networks.

• Sources: narcotics, extortion, charities, state sponsorship, counterfeit currency.
• Hawala moves value without moving money — no banking trail.
• State sponsorship provides the deepest and most resilient funding.
• Crypto and online wallets are the emerging channels.

India's legal and institutional response

The UAPA's Chapter IV (added 2012) makes raising, holding and using funds for terrorism a distinct offence, with property attachment; the PMLA treats terror finance as a scheduled offence, letting the ED pursue the money trail. FIU-IND analyses suspicious transactions and shares them with the NIA and IB; the NIA has a dedicated terror-funding investigation mandate and has prosecuted high-profile cases, including the 2017 J&K terror-funding case involving separatist leaders funded through hawala from Pakistan.

The MHA's Combating Financing of Terrorism cell coordinates policy; the CFT risk assessment and the National Risk Assessment (2022) map vulnerabilities. India designated 'individual terrorists' under the 2019 UAPA amendment, enabling asset freezes without waiting for organisational bans. The Unlawful Activities framework is complemented by the Weapons of Mass Destruction Act 2005 (amended 2022) for proliferation financing.

• UAPA 2012: terror financing as a distinct offence.
• PMLA: ED attaches terror-finance assets.
• NIA's 2017 J&K terror-funding case exposed hawala-funded separatism.
• National Risk Assessment 2022 maps CFT vulnerabilities.

The FATF and the global regime

The global counter-terror-financing architecture rests on UN Security Council Resolution 1373 (2001), the 1267 sanctions regime, and the FATF's 40 Recommendations, which require countries to criminalise terror financing, freeze terrorist assets and regulate money services and non-profits. FATF's mutual evaluations and grey/black listing create powerful economic incentives: grey-listed countries face higher borrowing costs and reduced investment.

India has wielded this regime effectively. It joined FATF in 2010, pushed for Pakistan's grey-listing in 2018 (lifted 2022 after action-plan compliance, with continued monitoring), and secured UN 1267 listings of JeM chief Masood Azhar (2019) and others. India also hosted the FATF-style regional body APG's engagement and the 2022 'No Money for Terror' ministerial conference in New Delhi, positioning itself as a leader in the global CFT effort.

• UNSCR 1373 obliges all states to criminalise terror financing.
• 1267 committee sanctions: asset freeze, travel ban, arms embargo.
• FATF grey listing raises a country's cost of capital.
• India hosted the 'No Money for Terror' conference in 2022.

Persistent challenges

Three gaps persist. First, informal channels: hawala and cash dominate the informal economy, leaving no records to trace. Second, the non-profit sector: thousands of NGOs receive foreign and domestic funds with limited scrutiny — the FCRA regime has tightened foreign contributions, but domestic charitable fronts remain vulnerable. Third, new technology: cryptocurrencies, gaming wallets and crowdfunding platforms offer pseudonymous, borderless transfer that regulation is still catching up with.

Strategically, terror financing adapts faster than regulation. Small-scale, low-cost attacks (lone wolves, IEDs) need little money, so choking funds cannot alone prevent attacks. The response must combine financial intelligence with human intelligence, international cooperation, and — hardest of all — sustained pressure on state sponsors, where FATF listing is the most effective lever India has found.

• Hawala and cash leave no trail; the informal economy is the blind spot.
• FCRA regulates foreign NGO funding; domestic fronts are harder to police.
• Low-cost attacks reduce the deterrent value of financial choking.
• State sponsorship can only be countered diplomatically — FATF is the key lever.

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