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FATF launched the Mutual Evaluation Report (MER) for India

Syllabus: Internal Security: Money laundering

Source: FATF

 

Context: India has made significant progress in complying with FATF standards and tackling illicit finance, but it needs to continue improving as its economy grows. The

(Mutual Evaluation Report) MER on AML (Anti-money laundering) and CFT (Countering Terror Financing) measures placed India in the “regular follow-up” category, recognizing its effective compliance with FATF standards.

 

Background:

In June 2024, the FATF plenary in Singapore recognized India for achieving a “high level of technical compliance” with global anti-money laundering standards. India was placed in the “regular follow-up” category, the highest rating by FATF, making it the only major federal economy to achieve this status, alongside G-20 countries like the UK, France, and Italy.

 

Key Highlights of the FATF Mutual Evaluation Report on India:

Highlights Description
Areas Requiring Improvement India was found partially compliant in three areas:
Non-Profit Organisations (NPOs): NPOs enjoying tax exemptions could be vulnerable to terror funding. The system needs stronger measures to address risks.
Politically Exposed Persons (PEPs): Ambiguities exist around the source of wealth, funds, and ownership for domestic PEPs. These need to be clarified.
Designated Non-Financial Businesses and Professions (DNFBPs): Gaps in regulation and supervision, especially in sectors like precious metals, stones, and real estate, which are vulnerable to money laundering.
Money Laundering Risks Key sources include fraud, cyber fraud, corruption, and drug trafficking.
PMS Vulnerability Precious metals and stones (PMS) can be used to move funds without a trace, increasing ML/TF risks due to the size of India’s PMS market.
Cross-Border Criminal Networks in PMS: Criminal networks in PMS may be under-investigated. Gold and diamond smuggling requires deeper risk analysis.
Terrorist Financing Threats India faces terrorism risks from ISIL, Al-Qaeda-linked groups, and regional insurgencies in the Northeast and Left-Wing Extremism.
Financial Inclusion Significant progress with increased bank account holders, digital payments, and transparency measures like GST and e-invoices.
Action Against Terror Financing Acknowledged the effective role of NIA and Enforcement Directorate in disrupting terror financing.

 

Key Recommendations of FATF:

  1. Expedite pending money laundering trials, including human trafficking and drug crimes.
  2. Implement targeted financial sanctions to freeze assets promptly.
  3. Define domestic PEPs under PMLA and apply enhanced risk measures.
  4. Protect NPOs from terror abuse with risk-based measures.

 

About the Financial Action Task Force (FATF): 

  1. FATF is an inter-governmental policy-making and standard-setting body dedicated to combating money laundering and terrorist financing.
  2. Objective: To establish international standards, and to develop and promote policies, both at national and international levels, to combat money laundering and the financing of terrorism.
  3. Origin: It was established in 1989 during the G7 Summit in Paris to develop policies against money laundering. In 2001 its mandate expanded to include terrorism financing.
  4. Headquarters: Paris, France.
  5. FATF members include 39 countries, including the United States, India, China, Saudi Arabia, Britain, Germany, France, and the EU as such. India became a member of FATF in 2010.

 

Mutual Evaluation Report of FATF: 

  1. The mutual evaluation report is an assessment of a country’s measures to combat money laundering, financing of terrorism and proliferation of weapons of mass destruction
  2. The reports are peer reviews, where members from different countries assess another country.
  3. During a mutual evaluation, the assessed country must demonstrate that it has an effective framework to protect the financial system from abuse.
  4. The FATF conducts peer reviews of each member on an ongoing basis to assess levels of implementation of the FATF Recommendations, providing an in-depth description and analysis of each country’s system for preventing criminal abuse of the financial system.

 

Mutual Evaluations have two main components: 

  1. Effectiveness: The most important part of a mutual evaluation is a country’s effectiveness ratings. During this visit, the assessment team will require evidence that demonstrates that the assessed country’s measures are working and delivering the right results.
  2. Compliance: The assessed country must provide information on the laws, regulations and any other legal instruments it has in place to combat money laundering and the financing of terrorism and proliferation.

 

FATF has 2 types of lists: 

  1. Black List: Countries known as Non-Cooperative Countries or Territories (NCCTs) are put on the blacklist. These countries support terror funding and money laundering activities. The FATF revises the blacklist regularly, adding or deleting entries. Three countries North Korea, Iran, and Myanmar are currently on FATF’s blacklist.
  2. Grey List: Countries that are considered a safe haven for supporting terror funding and money laundering are put on the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.

 

Consequences of being on the FATF blacklist: 

  1. No financial aid is given to them by the International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB) and the European Union (EU).
  2. They also face a number of international economic and financial restrictions and sanctions.
  3. In addition to economic consequences, Black- and Grey-Listing damages a country’s reputation and reduces its international standing.

 

Mains Links: 

Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels. (2021)