Crime rackets that fund terrorists' violent campaign: Chris Blackhurst and Donald Macintyre examine efforts to sever the financial lifeline

OFFICIALS at the Northern Ireland Office became aware in late 1991 that the IRA was not as flush with cash as it once was.

A series of armed robberies in the Irish Republic alerted them to the fact that their policy of tackling traditional sources of terrorist finance head-on, in the drinking clubs and back-streets of Belfast and Londonderry, was at last bearing fruit.

Of the two sides, the IRA's need for money is more acute than that of the loyalist groups. Estimates as to the amounts they require vary, but officials reckon that running the IRA costs pounds 5m a year compared with pounds 2m for the Ulster Defence Association and Ulster Volunteer Force.

The difference is explained by the IRA's mainland Britain and European campaigns, entailing the provision of cars, safe houses, arms and living expenses for active terrorists.

Until 1991, most of that cash was raised from clubs, gaming machines, taxis, pirated videos and extortion rackets. Contrary to popular belief and image, the contributions from outside Ulster - from Noraid in North America for the IRA, and enclaves in Scottish and English cities for the loyalists, were never that great. At most, according to filings in the US, Noraid supplied dollars 500,000 ( pounds 330,000) a year.

In October 1990, the Northern Ireland Office's terrorist finance unit and the RUC decided to try to sever the flow of cash at its source, in the clubs of west and east Belfast.

One of several important factors behind the new drive was a detailed and privately circulated paper on IRA sources of finance compiled by the then backbench MP David Davis, now a minister.

Choosing which clubs to target was not difficult. There were more than 600 registered social clubs in Northern Ireland. Most had roughly the same level of takings and profitability. About three dozen, though, should have been earning far higher sums than they were declaring. They were popular haunts in the Catholic and Protestant heartlands, yet they were barely making money.

Typically, such a club could expect to earn pounds 6,000 a week. Yet they were showing takings of only pounds 3,000. The rest, officials surmised, was going into back-pockets and to paramilitary groups.

On 5 October 1990, the RUC raided 37 clubs and other premises. In court, the RUC objected to the renewal of their licences. Magistrates upheld the objection in 30 cases. All the clubs appealed to the county court. In 15 cases, the appeal was rejected; in the remaining 15, the RUC agreed to the renewal of licences provided they introduced proper accounting procedures.

It would be dangerous to exaggerate the extent to which the IRA's capability has been undermined by government action to curb its finances. It has long been recognised, for example, that securing weaponry and explosives was not the main problem - at least for the IRA - because the huge stocks that it had built up from Libya and other sources, were probably enough to last well into the next century. On the other hand, the paramilitaries did require a steady income at the very least to maintain the families of prisoners and to pay 'active service units'.

Officials identified as early as 1990 a number of vital sources for such income, beside the social clubs, collections and Noraid. These, acccording to unofficial government sources, included:

Pirating of US and Australian videos not yet released in the UK ( pounds 500,000 a year).

Gaming machines which showed a return of only 1 per cent of turnover, compared with 15 per cent in Britain ( pounds 250,000 a year).

Forged tax exemption certificates used by contractors on building sites ( pounds 1m).

Cross-border smuggling of goods between North and South (proceeds unknown).

Protection rackets (unknown).

Social security fraud (unknown).