Crippling Terror Financing – India’s Strategic Imperative

In the shadow of the Red Fort, a car explosion on 10 November claimed 13 lives and injured many more, sending shockwaves throughout the nation. This act of terrorism served as one more brutal reminder of the persistent hostility of our neighbour. We all know that terrorism feeds on two lifelines: ideology and money. While the seeds of ideology are founded in religious extremism, the nourishment of financing adds fuel to the fire.

As we engage to proactively counter this threat, the kinetic operations of the National Investigation Agency (NIA) and our security forces need to be complemented with a robust financial one – by effectively tracking, crippling and starving the terror ecosystem of the funds required for the operations.

HOW THE MONEY MOVES

Traditional hawala systems, those informal value-transfer networks that have existed for centuries, still flourish. They are fast, cheap, and anonymous. Money leaves Dubai and reappears in Srinagar without a single banking record. But hawala alone no longer tells the full story. Terror financing today hides in plain sight—in a stream of micro-transactions, in anonymous crypto wallets, in e-commerce orders for innocuous materials that can become deadly weapons. A single click can move funds across continents faster than any courier ever could. For India, the success of UPI, world’s most digitised payments ecosystem brings both pride and peril. “Mundane financial footprints,” as FATF calls them, often slip under automated surveillance thresholds. A ₹5,000 digital transfer through UPI doesn’t trigger alarms, but hundreds of such transfers across wallets or bank accounts can bankroll an attack. The result is a dense fog of micro-activity behind which extremism thrives.

The misuse of charitable organisations and NGOs adds another layer of complexity. Funds raised in the name of welfare can be diverted for violent ends. India’s own experience with groups like the Popular Front of India (PFI) demonstrates how community collections, zakat funds, or crowd-sourced donations can morph into instruments of radicalisation. Hence, transparency in nonprofit operations is no longer optional; it’s a security necessity.

CURRENT REGULATORY BLUEPRINT

The Government has indeed implemented a comprehensive regulatory framework to counter terrorist financing. A multi-layered system is in place to monitor fund flows across cash, banking, and digital channels. In the cash economy, measures such as demonetisation and the withdrawal of ₹2000 notes were aimed to curb large unaccounted transactions, supported by on-ground surveillance and restrictions on high-value cash dealings. In the banking network, stringent KYC and periodic re-KYC requirements, along with mandatory reporting of large and suspicious transactions under the PMLA, ensure traceability of money movement. In digital and wallet platforms, every wallet is linked to a KYC-verified SIM and mobile number, with SMS authentication and upper transaction limits acting as safeguards against misuse. Additionally, the prohibition on unregulated cryptocurrency transactions and the monitoring of Virtual Asset Service Providers (VASPs) under the PMLA framework further restrict the use of virtual currencies for illicit transfers. Together, these regulatory measures indeed create a tightly regulated ecosystem that deters anonymity and strengthens India’s defences against terror and illicit finance.

Further regulatory actions include strengthening the Unlawful Activities (Prevention) Act, 1967 (UAPA) to designate individuals and entities for terrorist financing, amending the Prevention of Money Laundering Act, 2002 (PMLA) regime to broaden the definition of “reporting entity” and tighten the loop-holes in money transfers, the establishment of specialised cells like the Terror Funding and Fake Currency Cell under the National Investigation Agency (NIA) to investigate terror funding and fake currency operations, etc. At the international level, India works closely with the Financial Action Task Force (FATF) to align its anti-money laundering and counter-terror-financing regime with global standards.

CRACKS WITHIN

Despite these robust safeguards, terror financing still finds its way through systemic and human vulnerabilities. The challenge often lies not in the absence of regulation but in its implementation and enforcement. Most compliance mechanisms are anchored on Aadhaar-based identity verification, yet the proliferation of forged or fraudulently obtained Aadhaar cards undermines this foundation. When counterfeit identities pass through the system unchecked, they open gateways for the layering of illicit funds through legitimate channels. Moreover, while financial institutions and intermediaries are obligated to report suspicious transactions, regulatory effectiveness is weakened when oversight is compromised by corruption. The need of the hour is not only stronger laws but also greater sensitisation, accountability, and integrity among regulators and enforcement officers—ensuring that vigilance, not complacency, defines India’s financial security framework.

ROLE OF PROFESSIONALS

In the evolving war against terrorist financing, we as chartered accountants also have an important role to play. Their daily proximity to capital flows, client structures, and compliance documentation makes us uniquely placed to detect and disrupt illicit networks even before these reach the enforcement radar.

Recognising this importance, under the Prevention of Money Laundering Act (PMLA), practising professionals are recognised as Reporting Entities (REs) when they carry out specified financial transactions on behalf of clients — company formation, management of client money, or operation of bank accounts. This imposes obligations of Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and timely filing of Suspicious Transaction Reports (STRs) with FIU-IND. However, the professional’s role must evolve from statutory compliance to strategic vigilance. Examples include:

1.  Audit and Forensic Reviews – Detect round-tripping through shell layers, over-invoicing of imports, or diversion of CSR and NGO funds under the guise of “community welfare.”
2.  Due Diligence in M&A and Start-ups – Scrutinise investments routed via high-risk jurisdictions, layered SPVs, or virtual-asset holdings concealed through offshore wallets.
3. NPO/Trust Audits – Apply red-flag analytics to grant disbursals, ensuring end-use traceability and verifying whether donor-beneficiary patterns align with the stated charitable purpose.
4. Digital-Asset Compliance – Evaluate clients’ crypto transactions and VASP linkages for anomalies in KYC or wallet clustering, in line with FATF Recommendations.
5. Real-time Monitoring and STR Filing – Use automated data analytics and pattern recognition tools to spot micro-funding, split payments, or repeated small donations that cumulatively indicate potential terror-linked activity.

Beyond accountants, lawyers, fintech compliance officers, auditors in NBFCs, payment aggregators, and trustees also bear this fiduciary duty. The essence lies in ethical vigilance — viewing professional scepticism not merely as an audit standard but as a national-security obligation.

A GLIMPSE AHEAD

By 2047, India envisions itself as a secure, developed economy powered by technology and trust. Achieving that vision demands that we treat financial integrity as national security. When every accountant questions the unusual transaction, every fintech coder embeds an AML algorithm, every regulator share data promptly, and every citizen refuses to fund unverified causes, the terror networks will wither. So, the real question is not whether India can win this battle. It’s whether we can sustain the vigilance it demands. Because in the fight against terror financing, complacency costs lives.