By Katharine Houreld and Jibran Ahmad
PESHAWAR, Pakistan, July 11 (Reuters) - In the months before Pakistan jets began pounding Taliban hideouts in the lawless border region near Afghanistan, militants were busily conducting an unprecedented wave of kidnapping and extortion, stockpiling cash for the fight ahead.
Businessmen in some areas say extortion increased five-fold before the long-awaited military offensive began in the frontier region of North Waziristan on June 15. Militant-related kidnappings also spiked in the commercial capital, Karachi.
The crime wave means that, even if the military seizes control of remote and mountainous North Waziristan, the government still faces a well-armed and well-financed insurgency with roots dug deeply into Pakistan's big cities.
Their reach and their ability to carry out high-profile attacks was chillingly demonstrated by the June 8 assault on Karachi airport, which killed 34 people. Competition over money also helped fuel deadly intra-Taliban clashes earlier this year.
"They will use this money for fighting. For fighting the government, for fighting each other," said Saifullah Mehsud of the FATA Research Centre, an Islamabad-based think tank that works in Pakistan's Federally Administered Tribal Areas. "This is a well-developed war economy."
The crime wave also coincided with the collapse of sporadic peace talks between the Pakistani government and militants that had been pushed by Prime Minister Nawaz Sharif, an end that was hastened by the attack on Karachi airport.
Thomas Sanderson, a senior fellow at the Washington-based Center for Strategic and International Studies, believes the violence and extortion is likely to continue, in part because so many Taliban leaders have been killed in drone strikes.
"Militants who replaced dead commanders need to mount spectacular attacks to prove their leadership," he said, adding that they also needed "to squeeze the locals" for cash.
Somewhat surprisingly, the crime wave even seems to have had an impact on the Pakistani Taliban itself. In May, a faction broke away from the main group, accusing it of having become "a band of paid killers involved in unIslamic activities" like robberies, extortion and kidnapping.
"THIS IS AN EMERGENCY"
In Peshawar, a traffic-choked northern provincial capital, extortionists have targeted wealthy families using the same bomb-making techniques as the Taliban, said Shafqat Malik, head of the Peshawar bomb squad.
Before the offensive began, about two or three residents found small bombs outside their homes or businesses daily, he said, something very rare before peace talks began in February.
The bombers usually asked for between $50,000-$200,000, he said, and threatened a bigger attack if they were not paid. It was unclear how many paid.
Extortion demands in the city were up 500 percent since the start of the year, said Zahid Ullah Shinwari, the head of the Peshawar Chamber of Commerce.
At a recent meeting, dozens of angry traders complained of multiplying demands. One 80-year-old man who refused to pay was shot outside his home, Shinwari said.
Another wealthy factory owner who refused to pay installed CCTV, trenches and barbed wire around his factory and hired 70 armed security guards, he said.
"No one will invest here. Everyone is letting their equipment go obsolete and moving their families out," Shinwari said angrily. "This is an emergency. It is a crisis."
Most threats are not reported to the police, but even so, officers in several districts said they had seen a rise in complaints. Businessmen say the threats are forcing some of them to shut up shop.
"So many different people are demanding money that I have to move my business, because if you pay one, tomorrow another one will call," said one shop owner, who asked not to be identified. "How can we run our business in such a situation?"
Businessmen in other Pakistani cities also said extortion had rocketed while the government pursued peace talks although many, including Shinwari, said it had eased off since the offensive began and militants went into hiding.
In the western city of Dera Ismail Khan, businessmen complained that they had become accustomed to paying off just one group. However, when rival Taliban commanders began fighting in April, more came calling, demanding money and offering protection from rivals.
One man said his cousin refused to pay but had to move after two grenade attacks on his home. Another man, a doctor, said criminals had become so brazen they were asking for ransoms without even bothering to kidnap anyone first.
"They are calling from me time to time, and saying if I don't pay they will kidnap my kids or kill me," he said.
Pakistan does not publish national kidnap statistics but anecdotal evidence suggests few cases are reported to the police, who are largely seen as corrupt and ineffective.
While the army seems well-prepared for the offensive, experts say the government appears to have no parallel strategy to counter the booming criminality that fuels militancy.
Police say one their biggest problems - among many - is a law placing swaths of the area near the Afghan border off-limits to police and the courts.
Consequently the FATA became a safe haven for criminals and militants. Most ransom drops and kidnap releases happen there, they say.
"They should either make FATA part of Pakistan or cut it off," said one frustrated senior police official. "This law gives the militants a perfect hideout." (Editing by Paul Tait)