Economics Review Paper

Dr. Sushmita
Economics Faculty

Sahil Malani (BFIA 1B)

Prasuk Jain (BFIA 1B)

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 Financing of Terrorism

Abstract
In today's globalized world no nation has been left untouched by the threats of terrorism. The
perils of terrorism are not new to South Asian countries, like India, where, over the past few
years, there have been numerous acts of terror. Complex international connections and possible
links to transnational organized crime were identified in many of these incidents. Terrorism is an
evolving phenomenon, with terrorist organizations constantly changing the way they operate,
adding to the complexity and challenges faced by criminal justice professionals. The ability to
successfully address these challenges depends to a large extent on the ability of national criminal
justice systems to deliver fair and effective justice to perpetrators of terrorist offenses. National
action, along with international and regional cooperation, are key elements in effectively
countering terrorism.
This paper provides insight as to how the terrorist groups fund their organizations and the
channels employed by them to do so.

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 FUNDING OF TERRORISM
Stressing the importance of financing terrorist organizations, Ayers (2002) argues that, “Terrorists
cannot terrorize without money, without resources. The training cost money, planning costs money,
and explosives have cost, plane tickets cost money.”1 This is further supported by the international
Criminal Police Organization (INTERPOL, 2007), whichstates that “the frequency and severity of
international terrorist acts are often proportional to the financing that terrorists may obtain. The
following estimates show that terrorist groups especially those larger and more proactive, have
budgets that can go into hundreds of millions of dollars a year” (Freeman, 2011).2 Al Qaeda's annual
budget was estimated at 30 million US dollars (Passas, 2006).

❖ Sources of Financing of Terrorism

There are different views expressed by researchers on how terrorists raise funds. Harmon (2008), who
rightly points out that this in itself is “organized, diverse, and dimension sometimes complex terrorist
operations”.3 Krieger and Meierrieks (2011) are of the opinion that terrorist groups acquire financial
resources primarily from -4

(i) state funding

(ii) financing legitimate means (e.g., by legitimate business, charities, support diaspora etc.), and

(iii) private financing by illegal means, usually including a full criminal activity (bankrobberies, drug
trafficking, kidnapping, extortion).

In a slightly different context, Bell (2003) and Acharya (2009) suggest five models of financial
resources of terrorists: state sponsoring model, popular support model, entrepreneur model, model of
criminal proceeds and model of cybercrime financing.

➢ State Funding Model

This is a state of affairs where terrorist teams have faith in state funding. This was significantly common
in the era of the COLD WAR, where competing countries used coercion as a deliberate instrument of
foreign policy. Funding of state terrorism principally happens once goals (strategic and tactical) state
sponsor coincide with sponsored teams, like financing the cluster Western European terrorist

1
Ayers, A. (2002). The Financial Action Task force: The war on Terrorism will not be fought on the battlefield. New York. School journal of human rights, Vol.18, pp.
449-59.
2
INTERPOL (2007). The financing of Terrorism. Retrieved fromhttps://www.interpol.int/public/terrorism/financing.asp.
3
Harmon, C. (2008). Terrorsimtoda. London: rout ledge.
4
http://papers.ssrn.com/sol3/papers,cfm?abstract_id=1860069.

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movements and Third World liberation by the Soviet Union and its allies during the Cold War.
Though this manner of coercion has declined since the Nineties, countries like Iran and Syria
are still active sponsors of terrorism.

➢ Popular Support Model

Virtually all foreign terrorist organizations or networks enjoy the support of some type of
community, whether domestic or off-territory. Such logistical or financial support is generally
underpinned by a shared identity, be it spiritual, ethnic or philosophical, and comes from
charitable donations, diaspora members, and membership dues and direct donations from
members. Charity has become one of the primary means of raising revenue for terrorist groups,
raising funds from donors who may or may not know they are contributing to terrorism
financing. Freeman (2011) distinguishes this form of funding from charitable donations, noting
that diaspora support is based more on ethnic or racial affiliations and less on religious ones.

➢ Entrepreneur Model

One of the proofs of the complexities of act of terrorism finance is that terrorists conjointly
operate under an umbrella of legitimacy, holding, management and running legitimate
businesses and commercial enterprises to lift finances and conjointly to maneuver them. These
corporate covers consist of land, import-export and automobile sales firms, high-tech
laboratories, shipping, civil engineering and financial construction firms.

Al Qaeda, for example in the 1990s, had several legitimate businesses such as farms, various
trading companies, a tannery, construction, manufacturing and investment companies such as
in Sudan, and elsewhere.

➢ Model of Criminal Proceeds

The increased level of combat on the finances of worldwide act of terrorism by numerous state
and international organizations has pushed terrorist organizations’ urge to get more and more
involved in illegal funding activities. This usually happens once terrorist organizations aren't
any longer ready to attract (or after they lose) support their causes. This attraction to crime is
additionally strengthened by the existence of an inter-dependent dynamic link between
international crime and terrorist organizations. Terrorist involvement in criminal activities
extend from drug trafficking in humans, fraud, robbery, extortion, smuggling, oil theft, forgery,
money laundering.

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 ➢ Model of Cybernetic Financing

The growth of data and communication technologies in recent decades has offered

both opportunities for economic development and promote their worry of attracting crimes.
This is especially true for the internet, that has become a key tool for terrorist’s communication,
radicalization, recruitment and training, and for the institution and movement of funds.
Terrorists are now increasing their involvement in cyber-crimes like identity theft, credit card
fraud, money laundering etc., to boost funds; conjointly, they often try this online via a direct
request. The other side of cyber funding that is increasing like anything, is cleaning and moving
funds online making use of fund transfer and new technology payments, as banks and
alternative institutions are providing their customers financial services online.

❖ Methods and Channels of moving Terrorist Finances

For terrorist groups, unlike criminal organizations, the need to disburse money is
greater than the need to collect them. In this way, terrorists keep trying to come up with new
techniques to transfer funds and improve existing methods with the ultimate aim of avoiding
detection. Some of these are highlighted below:
➢ Money Laundering

Money laundering is taken into account as one amongst the most important obstacles for
maintaining an efficient operating international financial set-up. Money Laundering could be a
two-dimensional supply for terrorist organizations. It's a tool to boost funding and conjointly a
tool to maneuver them. According to the World Bank (2003), “Money laundering is the process
by which revenues derived from criminal activity (i.e., the offense) are disguised in an attempt
to disguise the origin of their situation and to legitimize the use in the future”. While terrorism
financing includes supporting terrorism through the injection of funds (legally or illegally
earned) money laundering involves converting the money earned illegally into legitimate
funds.4

➢ Financial Formal Systems

Although security measures within the formal banking industry is presently high, nonetheless,
terrorists have used and still use the defects within the system. Terrorists not solely rely on
Western banks rather they make enough use of Islamic banks, whose operations are led under
Islamic jurisprudence, and in some cases, terrorists or their financiers have dominant interests
in bank.

4
M. (2015, September 10). Money Laundering. Retrieved from
https://www.researchgate.net/publication/282402721_Money_laundering_A_primer_for_banking_staff
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Osama bin laden, for instance utilised the Sudanese Bank Al Shamal Islam, in
which he commanded a stake. The bank had correspondent agreement with massive banks
across Europe and North America to transfer funds to the account of an operative of Al-Qaida
in the Bank of America, which was used to buy a small plane.
It is pertinent to notice, that, except in cases wherever the banks are controlled by terrorist
organizations or their monetary facilitators, most financial institutions are not aware that
terrorist financing flows through their network.

❖ Micro-economic impacts

At micro-economic level, security measures of economic agents can include direct

expenditures on security technologies or indirect changes in consumption and investment
behavior to hedge against the risk of falling victim of a terror attack; in addition, dynamic
impacts of these changed consumption and investment patterns have to be accounted for.5
a) Security measures of consumers and households - There is solid research on household
measures to improve safety levels. A 2004 New York Times national survey found that
even after 9/11, households have taken little action to prepare for a terrorist attack.
b) Security measures of the private sector – Not so surprisingly, it has been deduced that the
possibilities for corporate security measures are very similar to those of households:
making investments in security in the form of equipment and technologies and
managerial decisions to protect against the risk of a terrorist attack, which is reflected, for
example, in investment decisions. In theory, companies that face a direct threat from
terrorist organizations must bear the cost of security technology and insurance coverage,
and often pay their employees a risk premium in the form of higher wages and salaries.
The actual amounts depend on the type of threat and the specific industry. The
underlying factor driving security spending stems from the level of risk aversion an
organization and its managers have.

From various studies, it can be deduced that companies are more concerned about the
negative effects of anti-terrorist measures with security regulations on their company than
they are about terrorism itself.

5
Abadie, Alberto; Gardeazabal, Javier (March 2003). "The Economic Costs of Conflict: A Case Study of the
Basque Country". The American Economic Review.

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 Consistent with this low-risk perception, McKinsey has found that very few report that their
companies have taken active steps to prepare for any one of the following scenarios that
could harm virtually any company: a pandemic, a natural disaster, or increased geopolitical
instability, such as terrorism.6

The limited concern about terrorism is not surprising given that only specific sectors are
likely to face a direct threat; and that indirect terrorist threats work through other channels,
i.e., changes in demand, disruption in supply chains and other operation risks7. In other
words,terrorism is likely to be addressed within other risk factors. But even if terrorism is
addressed within these wider sets of risks, it is usually seen that many companies “neither
manage riskwell nor fully understand the risks they are taking”.

A potentially even more important reason for the lack of security measures could derive
from the complexity to manage terrorism risk, which arises from several factors such as the
interdependent security environment in which businesses are located; the elusive threat and
dynamic uncertainty created by terrorism; and the significance of government actions to
increase or decrease the threat level that businesses face. Further, investment by one
company does not necessarily mean an actually enhanced level of security if other companies
or government fail to cooperate.

In conclusion, it is necessary to ask whether businesses’ little security investments are

justified given the low probability nature of terrorist events or whether they are in fact under
investing at the possible expense not only of their operations but also society at large.

c) Security measures at government level

It is a common phenomenon that while the activities of private actors are primarily aimed at
improving their own level of security through protective measures, governments are faced
with the responsibility of intellectually dividing their available resources between defensive
and proactive measures. The choice between the two is fundamental, especially in relation to
their actual impact on improving a country's security level. There is a general tendency to
favor defensive counterterrorism measures over proactive measures, which will result in a
balance of socially lesser benefits compared to proactive responses.

6
, . “.” scribd.com. https://www.scribd.com/document/142238718/ibiii-mmc-2 (accessed February 11, 2022).
7
Bruck, T. (2008, April 28). Survey of Economic Security. Retrieved from https://www.academia.edu/2098638/A_Survey_of_the_Economics_of_Security

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On the other hand, proactive strategies tend to offer purely public benefits to all potential
targets and often fall short of them, while defensive strategies tend to offer a large proportion
of vendor-specific benefits and often oversupply. For example, the response to 9/11 was
mixed; countermeasures (e.g., security regulations at borders and transport hubs) and
proactive measures (the invasion of Afghanistan and Iraq and the global pursuit of terrorists).
However, while governments are bearing the costs of proactive measures, the private sector
and households appear to be bearing much of the burden of government regulatory
safeguards, for example. government.

The regulatory actions taken by governments to improve safety can have a significant
impact on the economy. This leads to the question of the appropriate involvement of the
state in ensuring security. A fundamental question is whether the role of the state should be
limited to setting and monitoring safety standards, or whether its role should also include
financing and implementing safety. Proponents of the idea that the state should take care of
the actual provision of security argue that public provision reduces the incentives to lower
quality through cost-cutting compared to private provision.

TERRORISM IN INDIA
The Indian government uses the following working definition of terrorism, same as onewidely
used by Western nations as well as the United Nations, proposed by Schmid and Jongman in
1988:

“Terrorism is an anxiety-inspiring method of repeated violent action, employed by semi-

clandestine individual, group or state actors, for idiosyncratic, criminal or political reasons,
whereby the direct targets of violence are not the main targets. The immediate human victims
of violence are generally chosen randomly (targets of opportunity) or selectively
(representative or symbolic targets) from a target population, and serve as message generators.
Threat and violence-based communication processes between terrorist organization, victims,
and main targets are used to manipulate the main target (audience(s)), turning it into a target of
terror, a target of demands, or a target of attention, depending on whether intimidation,
coercion, or propaganda is primarily sought.”

— Alex Schmid and Albert Jongman

➢ List of Terrorist Organizations in India

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• Indian Mujahedeen (IM).
• Hizb -Ul- Mujahedeen.
• Jammu and Kashmir Liberation Front.
• Jamiat -ul- Mujahedeen.
• Muslim Janbaz Force.
• Tehrik -ul- Mujahedeen.
• Lashkar-e-Jabbar.
• Al Umar Mujahedeen.
• Communist Party of India-Maoist.

➢ Finance of terrorism in India

There are four essential components required by terrorists and organized crime groups to
achieve its objectives–mobility, logistics bases, communications and funding. The
finance of terrorism in India follows a hybrid model, which comprises terror funding from
within and on the further side the country’s borders. Through an assessment of past cases
that have emerged to light suggests that terrorists have utilized a range of channels to fund
their activities. There are numerous forms like “tactical terror financing”, “operational
terror financing” and “counterfeit currency”.

❖ Counterfeit Currency

India witnessed a very historic moment on November 8, 2016 when the government took the
remarkable step of demonstrating the 500- and 1,000-rupee notes. Prime Minister Narendra
Modi commented in his address to the country that one of the explanations for this policy was
to counter the growing threat of counterfeit Indian banknotes. In India, Fake Indian Currency
Notes (FICN) circulation has increased according to the Annual Reports of the Reserve Bank
of India (RBI). 488,273 in 2013-14. When it comes to the type of counterfeit banknotes in
2014-15, RBI data showed that counterfeit Rs500 banknotes were the most common with
273,923 banknotes registered. The Rs 100 and Rs 1000 notes were the second and third most
counterfeit notes, respectively.

Over the past decade, the Indian Ministry of Foreign Affairs has repeatedly raised concerns
about ISI and its involvement in the printing and distribution of FICN. The sources of DRI
have expressed the concern of concern about the superior quality of FICN, which makes it
annoying to differentiate from the real notes. He discovered the key names of individuals
concerned within the circulation of FICN through the Indo-Nepal border. PM Modi during
his address to the nation, subtly termed Pakistan as “enemies across the border” who have
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 been responsible for the circulation of FICN in India. The decision to demonetize Rs500 and
Rs1000 notes from circulation is said to have a massive positive impact by eliminating FICN
from India’s economy.

❖ Hawala System

Across the globe nowadays, as terrorist organizations look for new technologies, new
methodologies of operation, and newer sources of funding, their reliance on one traditional
system remains unchanged—they still use hawala system, a casual route of transferring cash,
to maneuver and distribute funds to their cadres and sympathizers across the world.

For example, in the July 2006 Mumbai train bombings done by the Indian Mujahideen

(IM), the Pakistan-based handlers of the group used the hawala route to transfer money to IM

cadres to execute the attack.8 Similarly, in the 2010 Times Square car bombing attempt in

New York, the perpetrator, Faisal Shahzad, had received money through hawala to plot the

attack.9
Therefore, the efforts made by three regions namely: India, US and European countries to cut
off sources of funding of terrorism is necessarily the containment of the Hawala or Hundi -
System. However, this is still a difficult task as the nature of hawala ensures that all areas
related to terrorism are the most difficult to gather accurate information.

The Economic Impact of Terrorism on Developing Countries

Terrorism creates a sense of vulnerability in the country where the attacks take place. This
can have wider economic implications. "This sense of vulnerability is particularly
detrimental to trade or foreign direct investment (FDI), since foreign nations always have
the opportunity to do business with nations that are less vulnerable to terrorism."
➢ Impact on Growth and FDI

One study found that terrorism did not have a significant impact on economic growth in
developed countries but did harm developing countries. The study found that one additional
cross-border incident per million population reduced the affected developing country's
growth rate by about 1.4 percentage points.

8
Press Trust Of India. “How Hawala impacts National Security.” indenigma.wordpress.com. , 14 Sep. 2015. Web. 11 Feb. 2022.
<https://indenigma.wordpress.com/2016/07/03/how-hawala-impacts-national-security/>.
9
S. (2016, November 11). From the Mumbai train bombings to the Times Square attack. Retrieved from https://qz.com/india/834932/from-the-mumbai-train-bombings-
to-the-times-square-attack-how-hawala-fuels-terrorism-across-the-world/
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Bandyopadhyay and Younas also saw a link between terrorism and a developing country's
ability to attract foreign investment. “Increasing terrorism in a developing country increases
the risk for foreign investors of not reaping the returns on their investments in the future.
They will look for safer alternative nations to invest in,” they wrote.
Bandyopadhyay and Younas, along with Todd Sandler, authored a 2014 study examining
the impact of terrorism on foreign investment. They found that a one standard deviation
increase in domestic terrorist incidents per 100,000 population reduced net FDI by $323.6
million to $512.9 million for the average sample country, while the comparable reduction in
the case of cross-border terrorist incidents ranged from $296.5 million to $735.7 million.
➢ Trade
Terrorism also increases the cost of doing business with countries affected by terrorism. This
increases the prices of the products, which in turn tends to decrease the exports and imports
of these nations.
One study found that a doubling in the number of terrorist incidents from 1960 to 1993 was
associated with a roughly 4 percent drop in bilateral trade between 200 countries.

Steps taken to combat Terror Financing and circulation of

Fake Indian Currency in the country
The Government has taken various steps to combat terror financing in the country, which
inter alia, include:
i. Strengthening the provisions in the Unlawful Activities (Prevention) Act, 1967 to
combat terror financing by criminalizing the production or smuggling or
circulation of high-quality counterfeit Indian currency.
ii. Constituting Terror Funding and Fake Currency (TFFC) Cell into National
Investigation Agency.
iii. Training programs are regularly conducted for the State Police personnel on
issues relating to combating terrorist financing.
iv. Intelligence and security agencies of Centre and States work together to keep a
close watch on the elements involved in terror financing activities and take
actions as per law.

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 BIBLIOGRAPHY

An Economic Model of Terrorism, S. Brock Blomberg, Gregory D. Hess And

AkilaWeerapana (Conflict Management and Peace Science,Vol. 21)
Advances in the Study of the Economics of Terrorism, Todd Sandler (Southern
Economic Journal, Vol. 79)
Global Terrorism Index, 2018 (Institute Of Economics And Peace)
Survey on the Economics of Security, DIW Berlin
Economics of Terrorism, David Gold
Economics of Terrorism, Peter J. Philip
The Economics of Terrorism, Michael D. Intriligator, Steven Coissard, (War, Peace
and Security)
The Economics of Terrorism and Counter-Terrorism: A Survey (Part II) (Economics
of Security Working Paper, No. 45, DeutschesInstitutfürWirtschaftsforschung (DIW),
Berlin)
The Economics of Terrorism, Walter Enders

The economics of terrorism and counterterrorism, volume 67

When terrorism is evidence of state success: securing the state against territorial
groups, David B. Carter

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