The economics of terror

Praveen Swami

National Security Adviser M.K. Narayanan's concerns on terror financing need careful study and critical discussion.

"AL-QAEDA," said Osama bin Laden in a September 2001 interview, "is comprised of such modern educated youths who are as aware of the cracks inside the Western financial system as they are aware of the lines in their hands. These are the very flaws of the Western fiscal system, which are becoming a noose for it."

Last week, the long-running global debate on terror financing and Osama's laptop-toting terrorists finally reached the pages of the Indian media.

Addressing delegates at the 43rd Munich Security Conference on Security Policy, National Security Adviser M.K. Narayanan said that "Stock Exchanges in Mumbai and Chennai have, on occasions, reported that fictitious or notional companies were engaging in stock-market operation." "Some of these companies," Mr. Narayanan asserted, "were later traced to terrorist outfits" a startling claim that took experts in India and abroad by surprise.

Noting that no criminal probe into the use of the stock exchanges by terror-linked companies has been initiated by the either the Securities and Exchange Board of India or the Central Bureau of Investigation, critics have argued that Mr. Narayanan's claims are excessive, even unfounded. If terror-linked companies were found operating on or manipulating the stock exchanges, they say, the Government needs to tell us who they were and what was done about it.

Intelligence sources have told this correspondent that Mr. Narayanan was referring to investments made by front companies for three West Asia-based commercial entities that the United States believes have links with Islamist terror groups. India quietly terminated the front companies' operations on the basis of intelligence provided by the U.S. However, no legal action was initiated since no actual crime like market manipulation or fraud had been committed.

Whatever the truth, the fact is that Mr. Narayanan's reference to the stock market was just 53 words of an 1,800 word argument on the problem of terror financing. Sadly, there has been little careful study and no serious critique of the larger concerns around which his speech was built.

War on the cheap

Images of millionaire terrorists playing the global markets have a filmi quality that makes them attractive to the mass media. In fact, terrorism is war on the cheap very cheap.

By most expert estimates, staging the Mumbai serial bombings of 2006 cost the Lashkar-e-Taiba no more than Rs.250,000. The Madrid attacks probably required less than Rs.750,000. Bombing the London Underground cost even less probably no more than Rs.100,000, all of it put together by the perpetrators themselves.

Figures such as these are small fractions of Al-Qaeda's expenditure on the 9/11 bombings, which are thought to have cost upwards of $500,000 to execute. In their wake, many commentators saw the future of terrorism as being apocalyptic in its scale requiring resources of the scale handled by business empires and nation-states.

Given that Al-Qaeda had controlled an impressive financial empire prior to 2001, this scenario seemed plausible. Some experts speculated Islamist groups might even be using their advance knowledge of terror strikes to play the market and thus finance both future strikes and an ever-expanding infrastructure of terrorism.

Despite the hype, though, no real evidence of terrorist insider trading or even Al-Qaeda stock-market involvement ever emerged. The U.S. National Commission on the 9/11 bombings recorded that "investigations by the Securities and Exchange Commission, FBI, and other agencies have uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions." Nor did the Commission find evidence that Al-Qaeda or its affiliates had invested in the stock market.

Less-than-innocuous links between organisations with stock market interests and terrorist groups did, however, surface in the 9/11 investigations. The National Commission found that Al-Qaeda had relied heavily on Saudi Arabia-based charities, such as the al-Haramain Islamic Foundation, to finance its activities. As the researcher Gerald Posner has painstakingly documented, these charities often received funds from Saudi Arabian corporate and government entities.

In his speech, Mr. Narayanan dealt specifically with the persistence of these charity-terror networks. "Sincere believers contributing to charities," he said, "are perhaps unaware that a sizeable portion of the funds go to fund terrorist activities and terrorist outfits."

Although many of these charities had been designated terrorist front organisations, the NSA noted, "most continue to operate under new labels." For example, Mr. Narayanan said, the "al-Rashid Trust went through several changes in nomenclature, while the banned International Islamic Relief Foundation morphed into the Sanabil al-Khir Foundation." He proceeded to note that the "conduits through which such funds find their way to terrorist organisations include established banking channels such as the Habib Bank in Pakistan."

Mr. Narayanan concluded by calling for "far greater vigilance and stricter provisions so as to make offshore jurisdiction more transparent." "In addition," the NSA said, "lifting banking secrecy and the corporate veil in terrorist-related cases would help. Some new and innovative disruption techniques could also be contemplated."

Will such measures in fact, as the NSA hopes, "limit terrorist capability to acquire weapons, recruit cadres, establish training facilities and state-or-the-art secure communications?"

Role of organised crime

Yes and no. The dirty secret that underpins the durability of most of India's multiple insurgencies isn't foreign money, but a web of organised crime and racketeering that together constitutes what the scholar Ajai Sahni has described as the "terror economy."

Both in Jammu and Kashmir and the Northeast, terrorist groups raise extensive funds from organised crime operations operations that target both local businesses and State development projects.

Much of the Hizb ul-Mujahideen's funding in Jammu and Kashmir comes from public works contractors, while the United Liberation Front of Asom's operations are underwritten by the region's tea estates.

Often, it is hard to distinguish between terrorism and mafia violence. In January 2006, for example, contractor Sajjad Ahmad Wani was kidnapped and hanged by terrorists after he failed to make protection money payments. Such killings have been regularly reported for years. As early as 2004, terrorists shot dead Maqbool Ahmad Jan after he bid for a project against a Hizb-backed rival.

Funds from such organised crime operations help terror groups build the patron-client networks that enable them to draw new cadre and develop a pool of local support. Sometimes, individual commanders will help the village poor during times of hardship. Terrorists have also become enmeshed with the political system, providing the muscle needed to corral voters. And as violence pushes the state apparatus into retreat, terrorists come to serve as a parallel judicial system, mediating both commercial and civil conflicts.

Linkages such as these have entrenched the terror economy and made it resistant to attack. Jammu and Kashmir has a poor record of acting against hawala operators routing funds to terrorists, because local politicians and businessmen use exactly the same networks. Large-scale cash-down property purchases Srinagar has seen property prices rise steadily through the long jihad, an exceptional development in a war-zone have never even been investigated.

As a consequence, politicians ideologically opposed to Islamists have often protested against counter-terrorist operations targeting them, fearful of disrupting the flow of wealth and the local political alignments that work in favour of one party or the other. As Dr. Sahni has noted, the "underground economy is a highly complex enterprise, is not vulnerable to conventional attack against individual agents and cannot easily be dismantled."

Focussing attention on global financial networks, as the NSA has done, is important. After all, the links of many terror groups in India with trans-national Islamist groups is well known. Many major terror strikes against targets in India notably the Mumbai serial bombings, or the Delhi strikes that preceded them were supported by funds sent in from Pakistan and West Asia.

At once, it is important to realise the limitations of such global action. Given the frustrations caused by terrorism's intimate embrace with the institutions of both state and civil society in many parts of India, the prospect that the fight can be won in the virtual world is seductive but illusory.

In his speech, Mr. Narayanan listed India's array of new legislation addressing terrorism: "(a) Foreign Exchange Management Act, 1999, (b) Narcotic Drugs and Psychotropic Substances Act, 2003; and (c) Prevention of Money Laundering Act, 2003 (which entered into force in July, 2005), apart from provisions in other Acts such as the Unlawful Activities (Prevention) Act of 1967 as amended in 2004."

Not a single successful terror-financing prosecution, however, has been possible despite these laws. Nor have the illegal networks that transport funds within India and across borders been significantly dented.

In old Delhi, the storerooms of angaria agents filled with sacks full of currency awaiting shipping across the country bear witness to the unaccounted-for cash with which much of India's day-to-day commerce is transacted. Hawala payments, too, can be transacted without fuss at a walking distance from the Delhi's police headquarters building. In terrorism-affected States, even the barest fig-leaf of subterfuge that veils the movement and use of unaccounted for funds is happily dispensed with: the tax inspector willing to take on the Kalashnikov is yet to appear.

If India is serious about fighting terror financing, it needs to address the crisis it actually faces not the one that appears easiest to solve.

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