FATF MUTUAL EVALUATION REPORT ON INDIA

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Context:

FATF praises India's Prevention of Money Laundering Act, terror financing; asks to improve prosecution.

Financial Action Task Force (FATF)

The Financial Action Task Force (FATF) is an inter-governmental body decision-making body.  It was established in 1989 during the G7 Summit in Paris to develop policies against money laundering.  It is a “policy-making body” which works to generate the political will to bring about national legislative and regulatory reforms in money laundering.  It has also started dealing with virtual currencies.  The FATF Secretariat is located in Paris.

Objective of FATF

FATF sets standards and promotes effective implementation of:

• Legal, regulatory and operational measures for combating money laundering.
• The FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse. 

Members of FATF

There are currently 40 members of the FATF: 38 jurisdictions and 2 regional organisations (the Gulf Cooperation Council and the European Commission). India became an Observer at FATF in 2006. Since then, it has been working towards full-fledged membership.  On June 25, 2010, India was taken in as the 34th country member of FATF.

FATF on terror financing 

FATF's role in combating terror financing became prominent after the 9/11 terror attacks in the US.  In 2001 its mandate expanded to include terrorism financing.  Financing of terrorism involves providing money or financial support to terrorists.

FATF has 2 types of lists:

Black list:

This backlist mentions the names of the countries that do not cooperate in the global efforts to prevent financial crimes such as money laundering, financing of terrorism, and financing of proliferation of weapons for mass destruction.   At present (September 2024), only the Democratic Republic of North Korea, Iran and Myanmar are mentioned in the FATF blacklist – countries subject to a Call for Action.

Grey list:

This is the list of countries where the anti-money laundering and counter-terrorist financing (AML/CFT) regulations are not entirely compelling and efficient enough to counter money laundering and terrorism financing. At present (September 2024), 21 countries are on the FATF Grey list, including Nigeria, Croatia, Namibia, Kenya, Syria, Vietnam, and many more.

Consequences of being in the FATF grey list:

• Economic sanctions from IMF, World Bank, Asian Development Bank.
• Problem in getting loans from IMF, World Bank, ADB and other member countries.
• Reduction in international trade.
• International boycott.

The FATF’s framework of measures to help countries tackle illicit financial flows.

These are listed as 40 Recommendations that are divided into seven distinct areas:

• AML/CFT Policies and coordination.
• Money laundering and confiscation.
• Terrorist financing and financing of proliferation.
• Preventive measures.
• Transparency and beneficial ownership of legal persons and arrangements.
• Powers and responsibilities of competent authorities and other institutional measures.
• International cooperation.

Recent FATF report on India and the significance of the observations

Mutual evaluation reports

The FATF monitors countries to ensure they implement the FATF standards fully and effectively.  FATF mutual evaluations are in-depth country reports that analyse the implementation and effectiveness of measures taken against money laundering, terrorist and proliferation financing.

The reports are peer reviews, where members from different countries assess another country.  After an analysis of a country’s anti-money laundering and counter-terrorist financing system, mutual evaluations give recommendations to further strengthen a country’s system.

The FATF had undertaken an evaluation for India in June 2010.  India was then placed in the “regular follow-up” category.

Signficance of India’s ranking

The “regular follow-up” ranking is being seen as a favourable outcome by India, as some developed countries had raised objections.

The “regular follow-up” rating is currently shared by only four other G20 countries — the UK, France, Italy and Russia (suspended from FATF in February 2023).

Most of the developing countries are in the “enhanced follow-up” category, which requires submission of reports on an annual basis, as against once in three years in the “regular follow-up” category.

Improvement areas for India

• Laundering in India originates from within: According to the report the main sources of money laundering in India originate from within, and the country faces a “disparate range” of terrorism threats from regional insurgencies in the Northeast and North, and Left-Wing Extremist groups.
• Terror threats: The “most significant” terror threats seem to be related to the Islamic State or al-Qaeda linked groups active in and around Jammu and Kashmir.
• Cyber-enabled fraud: India’s largest money laundering risks are related to fraud including cyber-enabled fraud, corruption and drug trafficking.

Observations

There was a disruption to the progress of prosecution of cases under the Prevention of Money Laundering Act (PMLA) during 2014-2022 as the government faced several challenges to the constitutionality of the law, although the number of money laundering investigations increased since the review period.

The number of prosecution complaints and concluded trials did not show a proportionate increase. Between 2018 and the FATF team’s visit in 2023, the Enforcement Directorate (ED) was able to secure convictions in only 28 money laundering cases.

FATF suggestions for further improvement

Limited number of prosecutions and convictions, risk-profiling of customers of financial institutions, monitoring of the Ministry of Corporate Affairs (MCA) registry for availability of accurate owner information, and the link between money laundering and human trafficking.

For the Non-Profit Organisations (NPO) sector, the FATF said India should ensure that measures aimed at preventing the sector from being abused for terror financing are implemented. It also called for major changes to address delays in prosecution of terror financing cases.

India needs to strengthen prosecution in money laundering (ML) and terror financing (TF) cases, protecting the non-profit sector from terrorist abuse, and supervision and implementation of preventive measures.

To reduce the number of pending trials,  India should aim to reduce the number of pending trials in ML cases – both for new trials and for the backlog, addressing the low number of convictions associated ML cases and increasing conviction-based confiscation, by making major changes to increase the capacity of the court system, and potentially the capacity of the ED.

Must read articles

PMLA : https://www.iasgyan.in/daily-current-affairs/pmla

ANTI-MONEY LAUNDERING LAW : https://www.iasgyan.in/daily-current-affairs/anti-money-laundering-law

SUPREME COURT TO REVIEW PMLA ACT :https://www.iasgyan.in/daily-current-affairs/supreme-court-to-review-pmla-act#:~:text=Prevention%20of%20Money%20Laundering%20Act%202002%20(PMLA),force%20on%201st%20July%202005.

Source:

https://www.fatf-gafi.org/en/countries/black-and-grey-lists.html

https://amluae.com/what-are-fatf-blacklist-and-grey-list-countries/#:~:text=The%20FATF%20Blacklist%20enlists%20the,of%20terrorism%2C%20or%20proliferation%20financing.

https://www.business-standard.com/about/what-is-fatf

https://www.business-standard.com/finance/news/fatf-praises-india-s-pmla-terror-financing-asks-to-improve-prosecution-124091900815_1.html