FATF Recognizes India’s Progress in Combating Illicit Finance

The Financial Action Task Force (FATF) has released its Mutual Evaluation Report on India, highlighting substantial progress in combating illicit finance. The report was adopted during the FATF plenary in Singapore (June 2024), placing India in the "regular follow-up" category—an acknowledgment of high technical compliance with FATF standards.

Context:

1. India is the only major economy with a federal structure to achieve the "regular follow-up" status.
2. Other G-20 countries in this category include the UK, France, and Italy.

Key Highlights of the Report

Areas for Improvement

1. Non-Profit Sector Risks:

   1. Implementation of measures to prevent the non-profit sector from being abused for terrorist financing must align with a risk-based approach.
   2. Outreach to non-profit organizations regarding their risks is essential.

2. Politically Exposed Persons (PEPs):

   1. Enhanced measures are being applied to PEPs, but there is a lack of coverage for domestic PEPs from a compliance perspective.
   2. Full implementation of requirements by reporting entities is necessary.

3. Non-Financial Sector and Virtual Assets:

   1. Early stages of implementing preventive measures and supervision in these areas.
   2. Urgent need to improve cash restrictions in the precious metals and stones sector due to its significant role in the economy.

Money Laundering Risks

1. Primary sources include fraud, cyber fraud, corruption, and drug trafficking.
2. Precious metals and stones (PMS) sector vulnerable to money laundering due to large transaction volumes without ownership trails.
3. Only 9,500 out of 175,000 PMS dealers are registered with the Gems and Jewellery Export Promotion Council (GJEPC).
4. Criminal networks in the PMS sector are under-investigated; ongoing monitoring of fraud and smuggling techniques is essential.

Terrorist Financing Threats

1. Significant threats from groups like ISIL and Al-Qaeda, particularly in Jammu and Kashmir.
2. Regional insurgencies and Left-Wing Extremist groups pose additional risks.
3. More efforts required to conclude prosecutions against terrorist financiers.

Financial Inclusion

1. Increased bank account holders and digital payment usage, supported by the Jan Dhan-Aadhaar-Mobile (JAM) initiative.
2. Implementation of Goods and Services Tax (GST) has enhanced supply chain transparency.

Action Against Terror Financing

• Acknowledgment of effective actions by the National Investigation Agency (NIA) and the Enforcement Directorate.

FATF’s Recommendations

1. Expedite pending money laundering trials; improve handling of human trafficking and drug-related offences.
2. Enhance frameworks for targeted financial sanctions to ensure timely freezing of funds and assets.
3. Define domestic PEPs under anti-money laundering laws and implement risk-based measures.

Implications of FATF’s Mutual Evaluation for India

1. International Collaboration and Asset Recovery: Enhanced ability to cooperate in tracking illicit assets, benefiting cases involving fugitives like Vijay Mallya and Nirav Modi.
2. Improved Access to Global Financial Systems: Better access to global financial markets, facilitating investments and borrowing from international institutions.
3. Strengthening Investor Confidence: Positive evaluation boosts India’s credibility, enhancing foreign direct investment (FDI) attractiveness.

What is The Financial Action Task Force (FATF) ? The Financial Action Task Force (FATF) is an intergovernmental organization dedicated to combating money laundering and terrorist financing. FATF sets international standards and policies to prevent the abuse of virtual assets and virtual asset service providers (VASPs). Origin: The Financial Action Task Force (FATF) was established in 1989 during the G7 Summit in Paris with the objective of developing policies to combat money laundering In 2001, its mandate was broadened to include terrorism financing as well. Headquartered in Paris, France Members: India became a member of the FATF in 2010. Argentina Australia Austria Belgium Brazil Canada China Denmark European Commission Finland France Germany Greece Gulf Cooperation Council Hong Kong, China Iceland India Indonesia Ireland Israel Italy Japan Korea Luxembourg Malaysia Mexico Netherlands New Zealand Norway Portugal Russian Federation * Saudi Arabia Singapore South Africa Spain Sweden Switzerland Türkiye United Kingdom United States * FATF suspended membership of the Russian Federation on 24 February 2023 FATF's Lists: Grey List and Blacklist: Blacklist: Countries known as Non-Cooperative Countries or Territories (NCCTs) are placed on the blacklist due to their support of terrorist financing and money laundering activities. Grey List: Countries considered safe havens for supporting terrorist financing and money laundering are included on the FATF grey list. This serves as a warning that the country may enter the blacklist. Blacklisted Countries: North Korea, Iran, and Myanmar are currently on the FATF blacklist. Consequences of Being Blacklisted: Blacklisted countries face economic and financial restrictions and sanctions, including the withholding of financial aid from international organizations like the IMF, World Bank, ADB, and the EU. Grey list countries : Bulgaria Burkina Faso Cameroon Croatia Democratic Republic of Congo Haiti Jamaica Kenya Mali Mozambique Namibia Nigeria Philippines Senegal South Africa South Sudan Syria Tanzania Türkiye Vietnam Yemen Consequences of Being Greylisted: The most significant implication of the graylist for a country is damage to the country's reputation, as its effectiveness in combating financial crimes such as corruption and money-laundering as well as terror financing is considered low by international standards. Economic sanctions imposed by the IMF, World Bank, and Asian Development Bank make it difficult to secure these institutions and other countries. International trade, investment, aid, and foreign currency inflows are all declining. Payment delays influence on supply chains and trade. Costs of cross-border transactions are rising.

Conclusion

The FATF Mutual Evaluation Report is a significant milestone in India's fight against illicit finance. It positions India as a leader in anti-money laundering and counter-terror financing efforts, setting a benchmark for other nations. However, continuous improvements, particularly in areas like NPOs and PEPs, remain crucial for sustaining progress and fostering international collaboration.

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