23-September-2024-Editorial

FATF MUTUAL EVALUATION REPORT ON INDIA (2023)

The Financial Action Task Force (FATF) recently released its Mutual Evaluation Report on India, highlighting the country’s substantial progress in combating illicit finance.

The report examines how effectively India has implemented anti-money laundering (AML) and counter-terrorist financing (CFT) measures, identifying areas of strength and those requiring improvement.

While acknowledging India’s efforts, the report also suggests measures to address vulnerabilities in financial systems.

Key Highlights of the FATF Mutual Evaluation Report

Strengths in India’s Financial System

• Financial Inclusion:
  India has made significant strides in promoting financial inclusion, largely due to initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY) and the JAM (Jan Dhan-Aadhaar-Mobile) Trinity, which have expanded access to banking and digital financial services.
• Use of Digital Payments:
  The rise in digital payments has enhanced financial transparency, supporting AML and CFT efforts. The Goods and Services Tax (GST) system, along with the use of e-invoices and e-bills, has also increased supply chain transparency.
• Action Against Terror Financing:
  Agencies such as the National Investigation Agency (NIA) and the Enforcement Directorate (ED) have effectively targeted terrorist financing operations, receiving praise for their efforts.

Areas Requiring Improvement

The report highlights three key areas where India’s financial system requires further attention:

• Non-Profit Organisations (NPOs):
  While many NPOs registered as charitable organizations enjoy tax exemptions, they are also vulnerable to misuse for terrorist financing. More robust measures are needed to manage and mitigate risks in this sector.
• Politically Exposed Persons (PEPs):
  There are ambiguities in verifying the source of wealth and source of funds for domestic PEPs. Greater clarity and stricter regulations are needed to ensure transparency.
• Designated Non-Financial Businesses and Professions (DNFBPs):
  The report identifies regulatory gaps in sectors like real estate and precious metals and stones (PMS), which are significant contributors to India’s economy. These sectors are particularly vulnerable to money laundering and terrorist financing due to the ease with which large sums can be moved without a clear ownership trail.

Money Laundering Risks

• Primary Sources of Risk:
  Key illegal activities contributing to money laundering in India include fraud, cyber fraud, corruption, and drug trafficking.
• Precious Metals and Stones (PMS):
  The size of India’s PMS market makes it a significant target for money laundering. There are approximately 1,75,000 dealers in this sector, but only around 9,500 are registered with the Gems and Jewellery Export Promotion Council (GJEPC). The lack of registration and oversight exposes the sector to risks, including cross-border criminal activities and smuggling.
• Need for Better Risk Understanding:
  The report stresses the need for more comprehensive data collection on the risks associated with gold and diamond smuggling to combat money laundering more effectively.

Terrorist Financing Threats

• Terrorism Threats in India:
  India faces substantial terrorist financing risks, particularly from groups like the Islamic State of Iraq and the Levant (ISIL) and Al-Qaeda-linked organizations in Jammu and Kashmir. Insurgent movements in the Northeast and Left-Wing Extremist groups also pose a threat.
• Convictions and Prosecutions:
  While India has prioritized the prevention and disruption of terrorist financing, the FATF calls for more efforts in concluding prosecutions and securing convictions against individuals and entities involved in terror financing.

FATF’s Recommendations for India

The FATF has outlined several recommendations for India to strengthen its AML and CFT frameworks:

• Pending Money Laundering Trials:
  India needs to speed up the resolution of ongoing money laundering trials, especially those related to human trafficking and drug offences.
• Targeted Financial Sanctions:
  The report suggests improvements in freezing funds and assets without delay and better communication about sanctions.
• Domestic PEPs:
  India should establish clearer definitions for domestic PEPs and apply enhanced due diligence to these individuals under anti-money laundering laws.

Implications of FATF’s Mutual Evaluation for India

Enhanced International Collaboration

• The recognition by FATF strengthens India’s ability to cooperate with international organizations and governments in tracking and recovering illicit assets, particularly in high-profile cases involving fugitive offenders like Vijay Mallya and Nirav Modi.
• Improved collaboration with global financial regulators will aid India’s efforts in countering terrorist financing and money laundering.

Greater Access to Global Financial Systems

• The positive FATF evaluation will boost India’s access to global financial markets, facilitating easier borrowing and attracting international investments.
• It also supports the expansion of India’s Unified Payments Interface (UPI) for cross-border digital payments, further integrating India into the global digital economy.

Strengthening Investor Confidence

• The favorable evaluation enhances India’s reputation as a safe and reliable investment destination, helping to attract Foreign Direct Investment (FDI).
• The report’s positive assessment of India’s financial system and AML/CFT efforts will boost foreign investor confidence in Indian markets.

Conclusion

The FATF Mutual Evaluation Report represents a significant milestone for India in its ongoing battle against money laundering and terrorist financing.

While India has made substantial progress, particularly in financial inclusion and the digital economy, there remain critical areas that require attention, such as the regulation of NPOs and domestic PEPs.

The report not only highlights India’s achievements but also sets the stage for further improvements, ensuring the country’s continued growth and collaboration on the global financial stage.