India’s progress in combating illicit finance was brought into focus on September 18, 2024, with the release of the Mutual Evaluation Report by the Financial Action Task Force (FATF). This comprehensive assessment highlights India’s achievements in adhering to global anti-money laundering (AML) and Countering the Financing of Terrorism (CFT) standards.
The country has demonstrated significant compliance with FATF’s technical recommendations, positioning itself as a committed player in global financial security.
However, as India’s financial sector continues to grow, the need for ongoing refinement in its regulatory framework becomes increasingly critical, particularly in areas such as prosecuting money laundering and terrorist financing offenses to ensure that crooks are brought to justice.
Geographically extensive, India covers 3.29 million square kilometers, sharing borders with many nations, making it central to regional security and economic collaboration. Its federal legal system, grounded in common law, provides a robust framework for governance.
The Supreme Court, as the highest judicial authority, plays a pivotal role in upholding the country’s legal structure. Over the years, India has steadily fortified its legislative and institutional framework to address financial crimes, including the implementation of Prevention of Money Laundering Act, 2005.
India took its first step toward aligning with international financial standards by applying for membership in the Asia Pacific Group (APG) on money laundering in 1998. Following that, the establishment of Financial Intelligence Unit (FIU) in 2004 further reinforced the nation’s capacity to track and counter illicit finance.
After more than a decade of sustained efforts, India secured full membership of FATF on June 25, 2010, marking a significant milestone in its commitment to global financial integrity.
India’s first Mutual Evaluation Report, published in 2010, identified certain shortcomings in its AML and CFT frameworks. The latest report, initially scheduled for release in 2020, was delayed due to the Covid-19 pandemic and underwent several postponements.
After receiving approval during the FATF’s plenary session in June 2024, the much-anticipated assessment was finally made public on September 18, 2024. This report provides an updated evaluation of India’s progress in addressing deficiencies highlighted in the earlier review and reflects the country’s ongoing efforts to strengthen its AML measures.
The report focuses on the country’s measures to combat illicit finance and highlights that India has made significant progress in implementing an effective AML and CFT framework. The evaluators commended the country’s robust system for understanding risks, accessing beneficial ownership information, and depriving criminals of their illicit assets.
Indian authorities have effectively utilized financial intelligence, cooperating both domestically and internationally to tackle these challenges.
The report emphasizes that Indian authorities possess a deep understanding of money laundering (ML) risks, and operational bodies are well-versed in terrorist financing (TF) risks. However, there remains room for improvement in addressing specific threats, such as human trafficking, migrant smuggling, and ML/TF risks linked to the trade of precious metals and stones.
While law enforcement agencies (LEAs) routinely access financial intelligence during investigations, the report recommends enhancing their capacity to pursue parallel financial investigations more effectively.
The report also acknowledges the Enforcement Directorate’s ability to investigate and prosecute complex cases, especially those involving fraud and forgery. However, it points out the need to strengthen efforts in prosecuting ML cases related to human trafficking, migrant smuggling, and drug trafficking.
India is advised to address the backlog of money laundering trials and increase the number of convictions by enhancing the court system’s capacity. Furthermore, the country should focus on conviction-based confiscations to better combat financial crimes.
In terms of implementing Targeted Financial Sanctions (TFS), India must ensure that all natural and legal persons freeze funds and assets without delay. The process of communicating TFS listings to relevant entities should be streamlined to ensure immediate compliance, in line with FATF requirements.
India has demonstrated a good understanding of risks and obligations in the financial sector, and preventive measures are steadily advancing. The recent inclusion of Virtual Asset Service Providers (VASPs) and several Designated Non-Financial Businesses and Professions (DNFBPs) as reporting entities that reflect progress, though with room for further improvements.
The checks to prevent criminals from entering the financial and DNFBP sectors are generally adequate, although gaps exist, particularly in the Dealers in Precious Metals and Stones (DPMS) sector and among some non-banking financial institutions.
India has made strides in improving Mutual Legal Assistance (MLA) coordination and responding promptly to international cooperation requests.
While competent authorities frequently seek international cooperation where necessary, there is still room for enhancing the quality of such requests. Informal cooperation with foreign counterparts has been proactive, especially by LEAs and the Financial Intelligence Unit (FIU-IND).
The report also identifies that India’s primary sources of money laundering originate from illegal activities within the country, including fraud, cyber-enabled fraud, corruption, and drug trafficking. These illicit proceeds are either laundered within India or abroad, then reintegrated into the legitimate economy. A major concern highlighted by FATF is the backlog of pending money laundering cases. India must improve the efficiency of its judicial processes to increase conviction rates and expedite trials.
Similarly, delays in prosecuting terrorist financing cases need urgent attention to ensure timely judicial resolution.
While India has made progress, these recommendations emphasize the need for comprehensive reforms to strengthen its AML/CFT regime and tackle evolving financial crimes. FATF’s summary of India’s technical compliance and effectiveness ratings shows a largely positive outcome, with 11 recommendations marked as fully compliant, 26 largely compliant, and only three partially compliant. There were no non-compliant ratings.
Regarding effectiveness, India achieved a substantial level in six areas, with moderate effectiveness in five others, indicating a need for continued improvement.
On the contrary, despite nearly 24 years since Pakistan opted for membership in the Asia Pacific Group (APG), the country has struggled to achieve satisfactory levels of both technical compliance and effectiveness.
Pakistan has been placed on the FATF ‘grey list’ multiple times, most recently staying on the list for over four years, reflecting ongoing deficiencies in meeting FATF requirements. Pakistan has yet to qualify to formally apply for FATF membership and attain the initial status of observer (however it is a member of Asia Pacific Group (APG) which is largest FATF-Style Regional Body).
Pakistan became a member of the APG in 2000, but it took seven years to introduce its first legislation related to money laundering. But the country is still facing difficulties in improving the AML-CFT regime aligning its regulatory framework with global norms.
Pakistan must prioritise improving its compliance with FATF standards by focusing on strengthening financial intelligence units, enhancing law enforcement capabilities, and addressing existing legislative gaps. Emphasizing risk-based supervision, accelerating judicial processes, and engaging in sustained outreach to high-risk sectors are essential steps.
Adopting a proactive stance on financial transparency and enforcing stricter anti-money laundering measures will also be crucial in raising Pakistan’s overall FATF compliance and effectiveness. Implementing these reforms can enable Pakistan to formally apply for FATF membership, a critical step, which has already been delayed due to our negligence.
Copyright Business Recorder, 2024
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
The writer is a US-based corporate lawyer, and specialises in white collar crimes and sanctions compliance. He has written several books on corporate and taxation laws of Pakistan. He can be reached at [email protected]
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