Q. Discuss counterfeit currency and money laundering as major sources of terror funding in India. State the actions being taken at International level to check these menaces. Highlight the role of Financial Action Task Force (FATF) and methods of compliance by its member states in preventing terror funding.

Model Answer: 

Terror financing via Fake Indian Currency Notes (FICN) and Money Laundering (ML) undermines economic sovereignty, sustaining cross-border terrorism, Left-Wing Extremism (LWE), and insurgent networks in India.

FICN and Money Laundering: Fueling Terror Networks in India

• State-Sponsored Subversion: High-quality FICN infused through porous borders (e.g., Nepal, Bangladesh) subsidizes logistical networks and recruits (NIA probes).
• Hawala & Underground Banking: Bypasses formal financial scrutiny to facilitate covert operational funding for sleeper cells and separatists (UAPA Sec 40).
• Trade-Based Money Laundering (TBML): Exploits under/over-invoicing in cross-border trade to transfer illicit value for terror infrastructure (Cross-LoC trade suspensions).
• Narco-Terrorism Pipelines: Drug syndicates launder Afghan opiate revenues through front businesses to finance Northeast insurgents and maritime smuggling.
• Fintech and Crypto Exploitation: Utilization of decentralized Virtual Digital Assets (VDAs) and mule accounts to mask beneficial ownership.

International Actions Against Terror Financing

• UN Sanctions Regimes: Binding resolutions (UNSCR 1267, 1373) enforce global asset freezes and arms embargoes on designated terror entities.
• Multilateral Intelligence Sharing: Egmont Group facilitates real-time cooperation among 170+ Financial Intelligence Units (FIU-IND).
• International Conventions: 1999 UN Terror Financing Convention mandates global mutual legal assistance and criminalization of cross-border terror funds.

Role of FATF and Compliance Architecture

The Financial Action Task Force (FATF) sets global AML/CFT standards through its 40 Recommendations, utilizing its International Cooperation Review Group (ICRG) to monitor compliance via Mutual Evaluations and strategic lists (Grey/Black lists).

Methods of Compliance by Member States

1. Legislative Harmonization: Enacting domestic laws criminalizing terror financing and ML (e.g., India’s PMLA, 2002; UAPA).
2. Targeted Financial Sanctions (TFS): Implementing real-time asset-freezing mechanisms without delay against designated individuals.
3. Beneficial Ownership Transparency: Mandating corporate registries to eliminate shell entities and untraceable overseas holdings.
4. VDA Regulation (“Travel Rule”): Compelling crypto exchanges to collect and share originator/beneficiary data during digital asset transfers.
5. Risk-Based Supervision: Rigorous oversight of Designated Non-Financial Businesses and Professions (DNFBPs) like real estate and non-profits.

Dismantling terror-financing architectures requires continuous domestic enforcement under PMLA alongside seamless multilateral compliance with evolving FATF standards to secure global financial integrity.