FATF's Pak challenge: Tracing routes of funds

Hindustan Times

23-06-2025

At one level it seems like a huge win for India. At least one major body has focused on the Pahalgam terror attack rather than the operation that followed it, and ensuing calls for restraint. The Financial Action Task Force (FATF), the foremost authority on money laundering and terrorist finance, has not just condemned the terror attack, but, last week, resolved to launch a probe noting that it could not have been carried out 'without money and the means to move funds between terrorist supporters'. Unlike various groups asking for proof of who did the attack, the FATF proposes to find it for itself. The Pulwama terror attack that killed 40 security personnel happened even as Islamabad was threatened with blacklisting. (Waseem Andrabi/HT)
The FATF was formed in 1989 by the G-7 countries, the European Commission and eight others (who are not listed), to combat money laundering, including 'terrorist financing and the financing of proliferation of weapons of mass destruction'. Over the years, it steadily increased its mandate to include all manner of actors including narcotics networks. India joined in 2010, after a rigorous examination of its banking systems, a review which happens periodically to protect the global system from danger.
In 2024, India again got an 'outstanding' report for its financial stability and probity, though the FATF warned about 'non-profit' associations being used for terrorist finance. A number of NGOs were shut down, causing a cry of illiberalism. Pakistan, on the other hand, was put on a 'grey list', which means its financial systems have significant deficiencies, three times: Once in 2008, and taken off the list in two years after some improvements; again in 2012 for not curbing terrorist financing among other things; and again in 2018 for the same reason. This time it kept it there until October 2022, during which period Islamabad sentenced Lashkar-e-Taiba leader Zaki ur Rehman Lakhvi to five years imprisonment, Hafiz Saeed to 33 years in jail, and set in place legislation including an Anti-Terrorism Act (Amendment) Bill, 2020 which updated the legal definition of terrorism to international standards. A legislation was introduced to bring Pakistan's laws in line with the UN laws on terrorist financing, 20 years after Resolution 1373 had been enacted, and further gave the State Bank of Pakistan a degree of autonomy to implement much of this.
That was when Imran Khan was in office, against an Opposition which feared their large unaccounted funds would come under scrutiny. Khan, who had a clean record on corruption, warned that going onto the 'black list' would mean an economic crash. A country on the black list is sealed off from the rest of the world in financial terms and faces serious difficulties in securing loans. At that time, Pakistan's external debt was 37.6% of GDP!
But terrorism did not stop. The Pulwama terror attack that killed 40 security personnel happened even as Islamabad was threatened with blacklisting. It paused after India retaliated with air strikes deep inside Pakistan for the first time. Subsequently, government reports showed a significant drop in infiltration attempts from 216 incidents in 2019 to 53 in 2022 (according to MHA reports).
But terrorist tactics simply shifted. Narcotics trafficking long associated with terrorism in Punjab returned. According to reports, some 251 transborder sorties by drones brought in weapons and drugs, this time mostly methamphetamine and derivatives from Lahore, even as underground tunnels were spotted along the international border. Second, terrorist groups became smaller in size but better trained and equipped. The personnel could live off the land for months in thick forests and were equipped with phones that evaded mobile towers. Then Pahalgam happened.
As the FATF swoops in, two things matter. The first is whether our forces have managed to crack the communication system of terror groups to trace the source areas. That is vital.
Second, Pakistan, despite the Taliban's crackdown on opium cultivation, seems to be able to access vast amounts of meth, as seen in the 300-kg seizure in April 2025 off the Gujarat coast. Pakistan also has money to continuously raise not just its defence budget — now far above the mandated 1.9% of its GDP when pensions are included — but also the pay of parliamentarians (by 138%) and defence personnel. Then, the FATF has to examine how Chinese funds are coming in to support the army, since none of it is evident in the budget papers. The FATF may also find other sources of financing, from outside the country. The sum of all this is to find out why Pakistan doesn't seem to care even if access to international financial assistance, crucial for it, is cut off.
If Prime Minister Shehbaz Sharif's call for peace has some basis, he could start by emulating Indian initiatives like linking national identity cards with bank accounts, use its very capable investigative agencies to root out terrorist accounts, and those of 'charitable' organisations such as the highly suspect Al Khidmat Foundation. The army will, of course, oppose this. But major financial institutions must back the politicians, by linking aid with democracy. Otherwise nothing at all will move forward.
Meanwhile, India had better look at hawala networks at home. Money has no nationality and no morals, and it could be used by hostile agencies as well. Time to get cracking for our own interests. Meanwhile, the Sharifs might actually find the going easier as terrorists are curtailed, and the army's powers with it.
Tara Kartha is director (research), Centre for Land Warfare Studies. The views expressed are personal.