Countering the High-Denomination Currency Funding Militancy in Pakistan

Executive Summary:

• Terrorist groups in Pakistan frequently use high-denomination currency to finance their operations. Permitting a large number of high-value notes to be in circulation makes it easy for bad actors to transfer considerable amounts of money without a digital footprint, making illicit activities easier to conduct.
• The relatively high availability of such bills in circulation in Pakistan is due to the country’s underutilization of electronic payment systems.
• India previously faced similar issues, which were resolved in November 2016 by a sudden and unannounced elimination of 86 percent of the country’s currency in circulation. While not carried out to address terrorist financing alone, this move was found to have significantly contributed to the decrease in terrorist-related incidents in India.

Militant groups in Pakistan are intensifying multipronged, coordinated attacks against government security forces and foreigners. One contributor to the violence is the ease with which terrorist groups can finance their operations, particularly through so-called “faceless kings,” a term given specifically to high-denomination currency. Permitting a large number of high-value notes to be in circulation makes it easy for bad actors to transfer considerable amounts of money without a digital footprint. This makes any number of illicit activities easier to conduct, including drug smuggling and terrorism financing.

This financing method contributes to the destabilization of the country. Unless this vulnerability is addressed, Pakistan will continue to be imperiled by, in particular, jihadist violence from groups such as the Tehreek-e-Taliban (TTP), also known as the “Pakistani Taliban.” Thus, it may become imperative for Islamabad to consider demonetizing high-denomination currency and promote digital transactions in order to develop financial transparency.

Dangers of the ‘Faceless Kings’

Data from the Pakistan-based Center for Research and Security Studies indicates that Pakistani jihadist groups no longer “hibernate” during the winter before launching attacks in the spring and summer. The number of terrorist attacks in Pakistan has spiked fourfold in the last four years, with fatalities tripling over the same span (PAK Institute for Peace Studies, January 3). Notably, militant groups in the western provinces of Balochistan and Khyber Pakhtunkhwa, such as the Baloch Liberation Army (BLA), the TTP, and Islamic State in Khorasan Province (ISKP) have been responsible for a spike in violence (Al Jazeera, December 21, 2023). These groups utilize guerrilla tactics and modern military equipment, which depend on funding from both domestic and international supporters. In January, members of an Islamic State (IS) suicide squad trained in Pakistan killed at least 95 people at a gathering in Kerman, Iran. This twin bombing was the deadliest terrorist attack in Iran for decades and occurred during the observation of the fourth anniversary of the death of Iranian military officer Qasem Soleimani (Dawn, January 4).

One reason for the rise of militant violence in Pakistan is the ability of such groups to finance their operations relatively unimpeded. This is in no small part due to the country’s underutilization of electronic payment systems. High-value monetary denominations are a particularly useful means of funding illicit activity; terrorists prefer using larger bills to conduct high-value payouts, thereby avoiding leaving a digital footprint. Militants in Pakistan also have been using the Kabul–Quetta–Karachi corridor to transport heroin, opium, hashish, and cannabis products for distribution in the global market. By controlling the poorly administered borders and coastal areas of Pakistan, militants help smuggle drugs in exchange for financial support from international criminal rings (InSight Crime, March 1, 2023).

According to Indian law enforcement, a bomb expert for Lashkar-e-Taiba (LeT) popularly known as “Tunda” was arrested in 2013 with several consignments of high-value currency notes. Tunda allegedly masterminded more than 40 bombings in India. He remarked that large denomination bills were “kings who could do anything for them.” Pakistani denominations currently in circulation include 10-, 20-, 50-, 100-, 500-, 1,000-, and 5,000-rupee notes. It is noteworthy that Pakistan, which makes up 3 percent of the world’s population, accounts for 7.1 percent of the world’s unbanked adults (The Express Tribune [Pakistan], March 29, 2023; World Bank, February 2, 2023).

Over the years, Pakistan has repeatedly appeared on the Financial Action Task Force’s (FATF) “grey list” for failing to address money laundering and terrorist financing through fiscal reforms. As the global watchdog’s eyes remained fixated on the Pakistani government’s inability to resolve the problem, the impact severely damaged the country’s ability to attract investors, lure international aid, and improve economic indicators. FATF non-compliance cost the nation approximately $38 billion from 2008 to 2018 (Nikkei Asia, March 3, 2021). Despite introducing a policy to curb terror financing in May 2019, Pakistan could not manage to be removed from the list. In October 2022, the country was finally removed from the list following improvements in its overall anti-money laundering/counterterrorist financing framework (Dawn, October 21, 2022).

The Indian Example

In 2016, the Indian government sought to address terrorist financing, illicit criminal activities, tax evasion, and widespread corruption by invalidating 1,000- and 500-rupee bills. In effect, on November 8 the country voided about 86 percent of its currency in circulation overnight (BBC, November 14, 2016). This move initially caused havoc because it was carried out suddenly, without much information being provided to the Indian public about what was happening or why. Economic growth, however, was not significantly damaged by this move (International Monetary Fund, accessed November 30). Presently, half of Indians now shop digitally (Mintel, June 16, 2022).

India’s demonetization, though not carried out to address terrorist financing alone, significantly contributed to the decrease in terrorist-related incidents in the country (The Economic Times [India], July 13, 2018). The demonetization heavily undermined the financial conduits used by Indian counterfeiters and terrorist and separatist groups, leaving little room for them to rebuild their networks.

Conclusion

While demonetization is not the only means by which Pakistan can address its multifaceted problems, particularly terrorism, it is a key part of the solution. The country must tackle the issue of “faceless kings,” and specifically high-value Pakistani rupee bills, which have helped allow jihadist extremism to flourish. In addition, Pakistani policymakers should consider moving toward an electronic payment-based system, as previously done by its neighbor.