FATF Praises India’s Anti-Money Laundering and Terror Financing Measures

1. In Sept 2024, the Financial Action Task Force (FATF), a global anti-money laundering and terror financing body, released its 2024 Mutual Evaluation Report on India.
2. The report praised India’s systems for combating money laundering and terror financing while it also urged India to expedite (speed up) its prosecutions in financial fraud cases.
3. During its plenary session in Singapore (June 2024), FATF adopted the report, recognizing India’s "high level of technical compliance" with global standards.

1. India was placed in the "regular follow-up" category, FATF’s highest rating for countries.
2. India became the only major economy with a federal structure to achieve this status.
3. Other G-20 countries in this category include the UK, France, and Italy.

FATF’s Mutual Evaluation Process

1. Purpose: A comprehensive and rigorous assessment to measure a country’s compliance with international anti-money laundering (AML) and counter-terror financing (CTF) standards.
2. India and FATF’s Mutual Evaluation:

1. Previous Evaluation: In June 2010, India was placed in the "regular follow-up" category, which was removed in June 2013.
2. Next Evaluation: India’s next mutual assessment is scheduled for 2031.

Key highlights of the FATF’s mutual evaluation report on India

1. India in the regular follow-up category:  India is in the "regular follow-up" category for compliance with anti-money laundering (AML) and counter-terror financing (CTF) standards.

1. This category reflects India's high compliance in tackling money laundering (ML) and terror financing (TF), though some non-financial sectors need better supervision and preventive measures.
2. India joins four other G20 countries (UK, France, Italy, and suspended Russia) in this classification.
3. Developing countries, in contrast, are mostly in the "enhanced follow-up" category, which requires more frequent reporting (annually vs. every three years).
4. India's Compliance Record: India fully or largely complied with 37 out of 40 FATF recommendations and met all of the "Big Five" requirements.

2. Areas for Improvement: India has had limited prosecutions and convictions in money laundering and terror financing cases.

1. Delays in prosecuting terror financing cases, due to constitutional challenges to the Prevention of Money Laundering Act (PMLA) between 2014-2022, were flagged.
2. Despite an increase in Enforcement Directorate (ED) investigations, prosecutions and concluded trials have not grown proportionately.
3. Risk Profiling: Financial institutions in India need to improve customer risk-profiling (process that evaluates a customer's financial risk by analyzing their financial behavior). 
4. MCA Registry Oversight: Better monitoring of accurate ownership information in the Ministry of Corporate Affairs (MCA) registry is required.
5. Human Trafficking Link: There is a need to focus more on the connection between money laundering and human trafficking.
6. Non-Profit Organisations (NPOs): Charitable NPOs with tax exemptions may be vulnerable to terror financing. India needs stronger measures to mitigate risks linked to these organisations.
7. Politically Exposed Persons (PEPs): Ambiguities exist regarding the source of wealth and funds for domestic PEPs. The government must address these issues and clarify beneficial ownership rules.
8. Designated Non-Financial Businesses and Professions (DNFBPs): There are regulatory gaps in supervising DNFBPs, especially in relation to money laundering and terror financing.

• DNFBPs significantly contribute to India’s GDP, with precious metals and stones accounting for 7%, and real estate 5%.

3. Financial Inclusion and Transparency: India has made notable progress in financial inclusion, with more bank account holders and increased use of digital payment systems. Simplified due diligence for small accounts has enhanced financial transparency.

1. Jan Dhan-Aadhaar-Mobile (JAM) and GST: FATF praised the JAM initiative for increasing financial inclusion and reducing reliance on cash.
2. The introduction of GST, with e-invoices and e-bills, was acknowledged for improving supply chain transparency.

4. Money Laundering Risks:

1. Sources of Money Laundering: Illegal activities like fraud, cyber fraud, corruption, and drug trafficking pose significant money laundering risks within India.
2. Vulnerability of Precious Metals and Stones (PMS): The PMS sector can be exploited for money laundering due to the ease of moving large funds without clear ownership trails.

• India’s large PMS market, with around 1,75,000 dealers, adds to the risk, though only 9,500 are registered with the Gems and Jewellery Export Promotion Council (GJEPC).
• Cross-border criminal networks in this sector may be under-investigated. As a global hub for diamonds and gems, India must continuously monitor fraud and smuggling techniques.

3. Need for Better Risk Understanding: India requires deeper data and improved risk assessment concerning money laundering and terror financing linked to gold and diamond smuggling.

5. Terrorist Financing Threats: India faces significant terror threats, particularly from ISIL and Al-Qaeda-linked groups in Jammu and Kashmir, as well as insurgencies in the Northeast and Left-Wing Extremist groups.

1. Efforts to Combat Terrorist Financing: India emphasizes preventing and disrupting terror financing, but more work is needed to successfully prosecute and convict those involved in terrorist financing.
2. Effective Enforcement: The FATF acknowledged the National Investigation Agency (NIA) and the Enforcement Directorate for their effective actions against terror financing.

6. Enforcement Achievements: The Enforcement Directorate (ED) confiscated around ₹16,500 crore in assets and recovered ₹141 billion in the Vijay Mallya case.

1. The FATF recognized ED’s success in handling complex, large-scale, cross-border money laundering cases and "hawala" operations.

7. Key Compliance Measures: India’s Cybercrime Coordination Centre, MCA's beneficial ownership registry, and the Central KYC Records Registry (CKYCR) were highlighted as important steps.

1. Task forces and high-level committees to combat corruption, black money, drug trafficking, and fake currency were commended.

8. Shell Companies Task Force: FATF noted the removal of 3,82,875 shell companies and the disqualification of over 3 lakh directors for not filing financial statements.
9. International Cooperation and Asset Recovery: India’s efforts in coordinating against illicit financial flows, international cooperation, and implementing targeted financial sanctions were appreciated.
10. Targeted Financial Sanctions: India needs to improve the framework for implementing targeted financial sanctions for freezing funds and assets quickly. The process needs streamlining for better communication.

Implications of FATF’s Mutual Evaluation for India

1. International Collaboration and Asset Recovery: FATF recognition improves India's ability to collaborate with other nations in tracking and recovering illicit assets, including those linked to fugitives like Vijay Mallya and Nirav Modi.

1. Stronger counter-terror financing efforts: Better coordination with global financial watchdogs strengthens India's role in combating terror financing.

2. Improved Access to Global Financial Systems: Positive FATF ratings facilitate India's entry into international financial markets, making borrowing and investments easier with global institutions.

1. Support for UPI expansion: The recognition boosts India’s Unified Payments Interface (UPI), promoting it as a preferred option for cross-border digital payments.

3. Strengthening Investor Confidence and credibility: A favourable FATF evaluation enhances India's financial credibility, encouraging foreign investors to see India as a more attractive destination for Foreign Direct Investment.

Financial Action Task Force (FATF) Established: 1989 during the G7 Summit in Paris. Purpose: Global watchdog against money laundering and terror financing. Members: 38 jurisdictions and 2 regional organizations. India’s Membership: Observer status in 2006; became the 34th member on June 25, 2010. Role: Sets international standards to prevent illegal financial activities and their societal impact. Governance: Operates as an independent body with a one-year presidency elected by the plenary. Secretariat: Located at the OECD headquarters in Paris. Functions FATF Standards: Developed to ensure a coordinated global response to crimes like money laundering, corruption, and terrorism. Identify Vulnerabilities: FATF identifies risks in national systems to protect the international financial network. Criminal Finance Targeting: Helps authorities trace criminal funds, including those from drug trafficking, human trafficking, and other illegal activities. Weapons Funding: Works to prevent the funding of weapons of mass destruction.

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