How India's banks are used to fund terror

As India battles unabated terror acts on its soil it has discovered a worrying trend of country's banks being potentially used to funnel money by various terrorist organizations in the country.

Maharashtra leads among states in reporting of suspicious transactions with about one-third of such cases being reported from the state.

A finance ministry internal report found out that banking companies reported a maximum of 11,840 suspicious transactions between 2006 and 2010. Financial institutions and intermediaries followed with 2,872 and 2,497 suspicious transactions reported respectively during 2006-10.

The report illustrates growing fear of penetration of terror outfits in the banking and financial system of the country. The finance ministry's Financial Intelligence Unit (FIU) has been entrusted with the task to tabulate all Suspicious Transaction Report (STR). FIU is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

Under the Prevention of Money Laundering Act (PMLA), 2002, a suspicious transaction includes a transaction that gives rise to a reasonable ground of suspicion that it might be involved in financing of the activities relating to terrorism.

The law defines such transactions as those involving funds suspected to be linked or related to or to be used for terrorism, terrorist acts or by a terrorist, terrorist organization or those who finance or are attempting to finance terrorism. But government does not conclude that all suspicious transactions would relate to terror acts since it lists several other parameters broadly under money laundering activities.     

As per the FIU report over 17,000 suspicious transactions were recorded in all during 2006-2010. The STRs recorded during 2006-07 stood at 817, growing to 1,916 in 2007-08, 4409 in 2008-09 and 10,067 in 2009-10 respectively.

In the banking sector that leads the list of suspicious transactions maximum 5479 STRs were reported by private banks in the country. Public sector banks, foreign banks, insurance companies and mutual funds too reported such transactions with 3878, 2403, 2063 and 1892 STRs recorded by them respectively.

The finance ministry, however, does not specify as to whether any action was taken on STRs recorded by its financial intelligence unit.  Secretary, Prime Minister's Economic Advisory Council (PMEAC) K P Krishnan said without mapping the finance ministry information with security data STR report would not on its own lead to any firm conclusion. He argued, "STR report is based on the financial transactions so we cannot conclude and relate this with terrorist financing unless security data of investigative agencies gets clubbed with this."

Expressing concern over the issue, former finance secretary, E A S Sarma said, "As the reporting system has improved it is possible that the persons intending to take part in illegal transactions have chosen other routes like hawala, FII acquisition of equity in Indian companies, real estate acquisition in foreign countries, clandestine investments in mining in other countries and so on."

Former chief of Research and Analysis Wing (RAW), A S Dulat described the increase in suspicious transactions as a matter of grave concern for the government. He said, "If government's own report is pointing that illegal money is being transferred by these routes, so why aren't they stopping it? Government should take some early actions in this matter."

Among states, Maharashtra dominated with maximum 29% share in STRs reported in all sectors. Delhi and West Bengal also followed with 12.1 and 7.3% share respectively. Other significant states in terms of share in STRs were Gujarat and Uttar Pradesh at 6%, Tamil Nadu 5.7%, Punjab 5.1%, Karnataka 4.7% and Andhra Pradesh 4.4%. Bihar and Chattisgarh conceded least 1.1% of suspicious transactions between 2006 and 2010.

On the increasing suspicious transactions in states, Sarma added "Even though some states like Maharashtra, Delhi and West Bengal still occupy high ranking positions in terms of the number of STRs, there are other emerging states like UP, Punjab, Andhra Pradesh, Haryana and Kerala where the share is on the increase. One has to watch these states closely."

Krishnan at PMEAC pointed to lack of operational coordination among investigative agencies as the "biggest problem." He said, "Government should marry all the investigative agencies together so that they can share data with one another. Without any more delay government should immediately start the proposed NATGRID project to avoid terrorist activities in the country."

As per the Prevention of Money Laundering Act, 2002 every reporting entity is required to report suspicious transactions to FIU, within 7 working days on being satisfied that the transaction is suspicious.