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.

Introduction

Terrorism is cheap to execute and expensive to sustain. Cadres, safe houses, weapons, communications and propaganda all need continuing finance, which is why disrupting money is more decisive than interdicting individuals — and why counterfeit currency and laundering are treated as security threats rather than economic offences.

Counterfeit currency

• Fake Indian Currency Notes serve two purposes at once: they fund operations directly, and circulating them attacks confidence in the currency itself, which is why the term economic terrorism is used.
• High-quality FICN requires industrial capability — specialised paper, intaglio printing, security threads — which points to state or state-tolerated production rather than local criminals.
• Routes have historically run through Nepal, Bangladesh, Sri Lanka and the Gulf, using the porous land border and courier networks.
• Counter-measures: the FICN Coordination Group under the MHA, an NIA-led Terror Funding and Fake Currency Cell, upgraded security features in the new note series, and demonetisation in 2016, whose effect on FICN proved temporary rather than structural.

Money laundering

• The classical three stages — placement of illicit cash into the financial system, layering through complex transfers to break the audit trail, and integration back into the legitimate economy.
• Hawala is the dominant Indian channel: value transfers without money crossing a border, settled between operators, leaving no formal record. This is what makes it hard to trace and easy to use.
• Trade-based laundering through over- and under-invoicing, and misdeclared shipments.
• Non-profit misuse, which is why FCRA regulation is framed as a security measure.
• Virtual digital assets, mixers and privacy coins as the current frontier, covered in our note on crypto and virtual digital assets.
• Note the asymmetry: terror financing can run in the opposite direction from laundering, taking legitimate money and applying it to illegitimate ends, which is why detection cannot rely on identifying criminal origin alone.

Action at the international level

• UN instruments: the International Convention for the Suppression of the Financing of Terrorism (1999), UNSC Resolution 1373 (2001) obliging criminalisation and asset freezing, and the 1267 sanctions committee listing regime.
• FATF and its nine FATF-Style Regional Bodies, including the Asia/Pacific Group and the Eurasian Group.
• Egmont Group of Financial Intelligence Units for operational information exchange between national FIUs.
• Basel Committee customer due diligence standards, the Wolfsberg Principles for private banking, and bilateral mutual legal assistance treaties.
• India's own initiatives: the draft Comprehensive Convention on International Terrorism, pending since 1996 over the definition of terrorism, and the No Money for Terror ministerial conference series, hosted by India in 2022.

FATF: role and method

• An inter-governmental body established at the 1989 G7 summit in Paris, extended to terror financing after 2001 and to proliferation financing later. India became a full member in 2010.
• It sets the 40 Recommendations, the global standard on anti-money laundering and countering the financing of terrorism.
• Mutual evaluation is its instrument: peer review assessing both technical compliance — are the laws in place — and effectiveness — do they produce prosecutions, convictions and confiscations. The second is where most countries fail.
• Listing. The grey list of jurisdictions under increased monitoring, and the black list of high-risk jurisdictions subject to a call for countermeasures. The mechanism works less through formal sanction than through reputational and financial-market cost: correspondent banking becomes harder, due-diligence costs rise and capital flows shrink.
• India's 2024 mutual evaluation placed it in the regular follow-up category, the best available outcome, while flagging pendency in prosecutions and delays in concluding cases.

Methods of compliance by member states

• Criminalise money laundering and terrorist financing in line with the Vienna and Palermo Conventions.
• Establish a Financial Intelligence Unit and mandate suspicious transaction and cash transaction reporting by regulated entities.
• Apply customer due diligence and KYC, enhanced due diligence for politically exposed persons, and record retention.
• Maintain beneficial ownership registers so corporate layers cannot hide the real owner.
• Implement targeted financial sanctions without delay under UNSC listings.
• Regulate virtual asset service providers and apply the travel rule to transfers.
• Supervise the non-profit sector on a risk basis, and enable international cooperation and asset recovery.

India's framework

The Prevention of Money Laundering Act, 2002, enforced by the Enforcement Directorate, with FIU-IND as the intelligence unit; UAPA for terror financing and asset attachment; the Fugitive Economic Offenders Act 2018; FEMA; the Black Money Act; and the extension of PMLA reporting obligations to virtual digital asset service providers.

Conclusion

Counterfeiting attacks the currency and funds the operation simultaneously; laundering makes the proceeds usable and the trail cold. International action has converged on FATF's standards because the enforcement lever is market access rather than treaty obligation. India's legal architecture is comprehensive, and its remaining gap is the same one FATF flags everywhere — the distance between technical compliance and conviction.