03-July-2024-Special-Article

FINANCIAL ACTION TASK FORCE (FATF) 

The Financial Action Task Force (FATF) is an intergovernmental organization that sets standards and promotes effective implementation of legal, regulatory, and operational measures to combat money laundering, terrorist financing, and other related threats to the integrity of the international financial system. The Mutual Evaluation Report (MER) assesses member countries’ compliance with these standards. 

Highlights of the MER Report on India 

• Regular Follow-Up Category: India has been categorized under ‘regular follow-up’, indicating strong compliance with FATF standards but with areas needing improvement. 

• India, alongside countries like Russia, France, Italy, and the UK, is required to submit progress reports on recommended actions by October 2027. 

• This category signifies India’s high level of technical compliance but highlights delays in prosecuting money laundering and terrorist financing cases. 

• Digital Economy Through JAM Trinity: India’s transition to a digital economy, supported by the Jan Dhan Yojana (Jan Dhan), Aadhaar (Aadhaar), and Mobile (Mobile), has strengthened efforts against ML, TF, and proceeds from corruption and organized crime. 

• Stricter cash transaction regulations have also contributed to mitigating financial risks. 

Significance of the MER Report on the Indian Economy 

• Enhanced Global Financial Reputation: Positive evaluation enhances India’s financial system credibility, potentially lowering borrowing costs and attracting more international financial institutions to initiatives like GIFT City. 

• Increased Foreign Investment: Trustworthy financial systems attract more foreign direct investment (FDI), especially in sectors requiring financial integrity such as fintech and e-commerce. 

• Expansion of Digital Payment Systems: Endorsement supports global adoption of India’s Unified Payments Interface (UPI), boosting its presence in international markets. 

• Boost to India’s Fintech Industry: Positive evaluation could accelerate growth in India’s fintech sector, attracting more venture capital and encouraging innovation in digital technologies. 

• Enhanced Remittance Flows: Efficient financial systems can streamline remittances from Non-Resident Indians (NRIs), a significant source of foreign exchange for India. 

What is Money Laundering and Terrorism Financing (ML/TF)? 

• Money Laundering (ML): Concealing the origin of illegally obtained money to make it appear legitimate. 

• Terrorism Financing (TF): Providing financial support to terrorists or terrorist organizations. 

Concerns and Suggestions by FATF for India 

• Vulnerability of Non-financial Sectors: Sectors like real estate are susceptible to illicit financial activities. 

• Recommendations include stronger due diligence and improved reporting mechanisms. 

• Prolonged Legal Processes: Delays in prosecuting high-profile economic offenders hinder effective AML/CFT efforts. 

• Solutions involve judicial reforms and enhanced use of technology in legal processes. 

• Virtual Asset Risks and Transnational Organized Crimes: Challenges posed by virtual assets (cryptocurrencies) require comprehensive regulations and international cooperation. 

• India needs better mechanisms for sharing information and cooperating with other countries. 

India’s Efforts to Combat ML/TF 

• National Level Efforts: 

• Prevention of Money Laundering Act (PMLA): Enacted in 2002 to combat money laundering. 

• Enforcement Directorate (ED): Responsible for enforcing PMLA through investigation and prosecution. 

• Financial Intelligence Unit-India (FIU-IND): Central agency for receiving, processing, and disseminating financial intelligence. 

• Global Level Efforts: 

• Ratification of UN Conventions and engagement with international bodies like Interpol and UNODC to align with global standards. 

Mains question: 

1. “Discuss the significance of India’s categorization under the ‘regular follow-up’ category by FATF and analyze the measures needed to strengthen India’s financial integrity against challenges like virtual asset risks and transnational organized crimes.” (150 WORDS)