Reforming India’s AML/CFT Framework: A Critical Need – OpEd
The Financial Action Task Force (FATF), on 19 September 2024, issued a stern warning to India in the form of its Mutual Evaluation Report (MER). The report, a result of the FATF plenary session in Singapore earlier this year, paints a concerning picture of India’s Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) frameworks. While India has made some progress in addressing these issues, FATF’s findings suggest that the country is still far from meeting international standards. The consequences of failing to reform could be severe, not only for India’s economy but also for its reputation on the global stage.
One of the most troubling findings in the MER is the continued presence of terrorist financing within India. The report highlighted that extremist groups, including left-wing insurgencies, ISIL, and Al-Qaeda, have found ways to collect and manage funds within the country. This is a significant issue, as it directly undermines India’s efforts to combat terrorism. FATF’s report points out that despite the existence of legal frameworks to address terrorist financing, enforcement has been weak, and gaps remain.
The issue of Non-Profit Organizations (NPOs) being vulnerable to terrorist financing was also raised in the report. NPOs, which are often registered as charitable organizations, have been evading tax regimes, allowing terrorist groups to exploit these entities for their financial needs. This is particularly concerning as it highlights a lack of oversight in a sector that should be closely monitored. FATF’s recommendation is clear: India must tighten its regulations on NPOs to prevent them from being used for illicit activities.
Politically exposed persons (PEPs) also came under scrutiny in the FATF report. The organization highlighted non-compliance by PEPs, particularly with regard to the sources of their wealth and beneficial ownership transparency. Domestic PEPs, in particular, are not subject to the same level of scrutiny as their international counterparts, creating opportunities for corruption and money laundering. FATF has recommended that India implement risk-based enhanced measures for PEPs to ensure that their financial activities are properly monitored.
Another critical area identified in the report is the regulation of Designated Non-Financial Businesses and Professions (DNFBPs). These sectors, which include real estate, precious metals, and gemstones, are particularly vulnerable to money laundering and terrorist financing activities. The report pointed out significant gaps in the regulation of these sectors, leaving them open to exploitation by criminal organizations. FATF has urged India to strengthen its oversight of DNFBPs to mitigate the risks they pose.
Cybercrime is another growing concern in India, with illegal activities such as fraud in cash-based transactions and drug trafficking serving as primary sources of money laundering. FATF’s report suggests that while India has taken steps to combat cybercrime, more needs to be done to address the vulnerabilities in its digital economy. Delays in prosecuting money laundering cases related to human trafficking and drug offenses have also been flagged as areas in need of urgent reform.
FATF’s recommendations for India are extensive and far-reaching. One of the key areas highlighted in the report is the need for India to expedite its money laundering trials. The delays in prosecuting these cases not only hinder justice but also allow criminals to continue their activities unchecked. FATF also emphasized the importance of targeted financial sanctions, calling on India to improve its framework for freezing funds and assets without delay. The current system is not efficient enough, leading to gaps in enforcement.
India’s regulatory framework for politically exposed persons (PEPs) is another area where reform is urgently needed. FATF has recommended that India clearly define domestic PEPs under its AML laws and implement risk-based enhanced measures for them. This would ensure that domestic PEPs are subject to the same level of scrutiny as their international counterparts, reducing the risk of corruption and money laundering.
The report also stresses the need for a comprehensive risk assessment of India’s financial institutions and NPOs. Without a clear understanding of the vulnerabilities in the system, it will be difficult for India to implement effective safeguards. FATF has called for stronger customer due diligence (CDD) obligations, particularly in sectors that are prone to money laundering and terrorist financing. Improving the reliability of identification documents is another critical recommendation, as identity fraud has been a persistent issue in India.
FATF’s Mutual Evaluation Report is a clear signal to India: reform is not optional, but a necessity. The consequences of failing to address these issues could be severe, not only for India’s financial system but for its international standing. As global scrutiny increases, India must take the necessary steps to align with international standards. The next few years will be critical in determining whether India can rise to the challenge or continue to struggle with these persistent vulnerabilities.
