FATF on India: Effective anti-money laundering system, low prosecution

• THE FINANCIAL Action Task Force (FATF) on Thursday placed India in the “regular follow-up” category for its compliance with anti-money laundering and counter-terror financing recommendations

Highlights:

• The Financial Action Task Force (FATF) has placed India in the “regular follow-up” category, acknowledging the country’s efforts to build an effective system to combat money laundering and terror financing.
• However, the global watchdog has emphasized the need for “major improvements” in prosecution and other areas.

Key Highlights of FATF’s Mutual Evaluation Report:

1. Effective but Needs Improvement:

• The report acknowledges that India has developed an effective framework, but there are gaps in areas like prosecution of money laundering and terror financing cases, risk profiling of financial institutions’ customers, and ensuring accurate information about beneficial ownership in the Ministry of Corporate Affairs (MCA) registry.

2. Sources of Money Laundering and Terror Threats:

• India's primary sources of money laundering stem from cyber fraud, drug trafficking, and corruption. The FATF also flagged India’s vulnerability to terror threats from regional insurgencies, Left-Wing Extremist groups, and Islamic State/al-Qaeda-linked groups in and around Jammu and Kashmir.

3. Prosecution Delays:

• The FATF noted the slow pace of prosecutions in money laundering and terror financing cases. While investigations have increased, the number of convictions remains low, with only 28 convictions secured between 2018 and 2023.

4. Non-Profit Organizations (NPO) Sector:

• The FATF recommended stronger measures to prevent misuse of the NPO sector for terror financing. It suggested more focused outreach to ensure that at-risk organizations understand the risks and sources of terror financing.

5. Politically Exposed Persons (PEPs):

• While India has incorporated a definition of foreign PEPs under the Prevention of Money Laundering Act (PMLA), it has yet to define domestic PEPs. The FATF urged the country to improve the identification of domestic PEPs and implement enhanced measures to mitigate risks related to them.

6. Targeted Financial Sanctions:

• The report urged India to enhance its system for freezing funds and assets related to terror financing. The FATF stressed that the process must be more streamlined and efficient to ensure funds are frozen without delay.

India's Response:

• Indian officials view the “regular follow-up” rating as a positive outcome, especially considering objections raised by some developed nations regarding the disclosure of beneficial ownership. A government official noted that India’s systems are in place to track investments from tax havens, a point of concern raised during the evaluation.

FATF’s Ranking System:

• India joins countries like the UK, France, Italy, and Russia (currently suspended) in the “regular follow-up” category, which requires reporting once every three years. In contrast, countries in the “enhanced follow-up” category, primarily developing nations, must report annually.

Next Steps for India:

• Indian authorities, including the Finance Ministry, have committed to improving the prosecution process for money laundering and terror financing cases, which the FATF flagged as a priority. While steps have been taken to address other recommendations, officials view the fast-tracking of trials as a crucial aspect to address.

Prelims Takeaways:

• Prevention of Money Laundering Act (PMLA)
• FATF