In an era where financial transparency is paramount, the Financial Action Task Force (FATF) has focused its attention on India, uncovering significant gaps in its anti-money laundering (AML) and counter-terrorist financing (CFT) frameworks. Released on September 19, 2024, the comprehensive Mutual Evaluation Report (MER) highlights alarming deficiencies in India’s financial integrity, painting a troubling picture of its current state.
Conducted during the FATF plenary session in Singapore in June 2024, this evaluation serves as a critical benchmark for India’s position within global financial systems, particularly concerning international financial institutions (IFIs). With both domestic and international threats on the horizon, the report calls for immediate action, compelling India to confront the financial vulnerabilities it has often attributed to others.
FATF Mutual Evaluation Report: Key Findings
FATF’s report presents India with a stark reality. The country has been placed under a “regular follow-up” category, requiring it to submit progress reports by October 2027. The report emphasizes the nation’s serious struggles with terrorist financing and money laundering, involving both domestic and international actors.
For instance, insurgency in India’s North East, left-wing extremist groups, and international terrorist organizations such as ISIL and Al-Qaeda are actively collecting and managing funds within Indian borders.
A significant vulnerability highlighted is the role of Non-Profit Organizations (NPOs). Charitable institutions are evading tax regimes and becoming susceptible to terrorist financing. FATF has also called out Politically Exposed Persons (PEPs) in India. These PEPs are failing to comply with legal requirements regarding wealth sources, money trails, and beneficial ownership. This non-compliance creates a substantial risk in investments involving domestic PEPs.
Another area of concern is the Designated Non-Financial Businesses & Professions (DNFBPs), where regulatory gaps allow illicit activities such as drug trafficking and cyber-enabled fraud to fuel money laundering. Additionally, the Indian gems and jewelry market, a significant player in the country’s economy, is seen as a contributing factor to terrorist financing due to insufficient oversight.
FATF Recommendations
FATF’s recommendations for India are far-reaching and stringent:
- Pending Money Laundering Trials: India must expedite its handling of human trafficking, drug-related crimes, and pending cases of money laundering.
- Targeted Financial Sanctions: The country is urged to improve its framework to freeze funds and assets without delay while streamlining communication on sanctions.
- PEP Oversight: India needs to define and implement enhanced measures for domestic PEPs under its AML laws.
- Strengthening Customer Due Diligence: FATF recommends India to tighten CDD obligations to prevent exploitation by terrorists and criminals.
- Risk Assessment: Conducting a thorough risk assessment of financial institutions and NPOs is imperative for identifying loopholes and mitigating risks.
- Improving Identity Documents: The reliability of identification documents must be enhanced to curb identity fraud.
These recommendations underscore India’s pressing need to bolster its institutions and regulatory frameworks if it is to maintain financial credibility on the global stage.
Analysis: India’s AML-CFT Struggles Mirror Pakistan’s Predicament
India has often been at the forefront of international criticism of Pakistan’s AML and CFT efforts. However, FATF’s report exposes a parallel set of challenges for India, raising questions about its own financial system’s vulnerabilities. While Indian authorities have long pointed fingers at Pakistan for failing to curb terrorist financing, this report forces India to confront its internal shortcomings.
The insurgency issues in the North East, the growing footprint of ISIL and Al-Qaeda, and the involvement of PEPs in financial misconduct demonstrate that India’s financial sector is far from clean. The FATF explicitly flagged delays in prosecutions under India’s Prevention of Money Laundering Act (PMLA) and Unlawful Activities (Prevention) Act (UAPA). These delays result in a high number of pending cases. This backlog in India’s courts not only hampers justice but also risks enabling financial crimes. It mirrors accusations India has made about Pakistan’s similar failures.
Moreover, FATF’s criticism of the gems and jewelry market’s role in money laundering is a significant black mark for India. The sector, deeply ingrained in the country’s economy, has become an easy conduit for illegal funds, a dynamic reminiscent of the hawala systems criticized in other nations. If India aims to uphold its international reputation, swift action on FATF’s recommendations is non-negotiable.
Also See: On FATF and India: The Accountability Conundrum
Amnesty International: Criticism of India’s NPO Oversight
Amnesty International has also weighed in on the FATF report, adding another layer of concern. The watchdog criticized India’s handling of non-profit organizations (NPOs). It condemned India’s heavy-handed approach to civil society and noted FATF’s warnings against harassing and intimidating NPOs under the guise of AML and CFT measures. Aakar Patel, Amnesty’s chair, highlighted how authorities have systematically abused laws like the Foreign Contribution (Regulation) Act (FCRA) and UAPA to target human rights defenders and activists.
This critique mirrors FATF’s recommendation for India to adopt a risk-based, educative approach with NPOs. It suggests that India should avoid imposing draconian measures that stifle legitimate activities. Authorities have revoked the licenses of thousands of NGOs under the FCRA. FATF acknowledges that India implemented the 2020 amendments to the act without adequately consulting the affected organizations.
A Double Standard on AML-CFT?
The FATF report presents a sobering reminder that India’s financial system, while achieving some success, remains vulnerable to exploitation. As the world’s fifth-largest economy, India cannot afford to ignore the critical areas FATF has flagged. India’s FATF MER reveals systemic issues, including regulatory gaps in DNFBPs. It also highlights the terror financing risks in the gems and jewelry market. The report points out how the NPO sector, heavily burdened by stringent laws, is a breeding ground for terrorist financing. Meanwhile, delays in prosecutions, inadequate PEP oversight, gaps in its digital economy, and vulnerabilities in its cyber and NPO sectors reflect poor governance in crucial areas.
The irony here is that the very criticisms India levies against Pakistan on terrorism financing are mirrored in its own domestic challenges.
FATF has placed India under regular follow-up until October 2027 following the FATF Mutual Evaluation Report. The country must face the music and enact substantial reforms. If it hopes to retain credibility in the global financial community, it needs to take action.
FATF’s report is a wake-up call—India must address these shortcomings if it hopes to reclaim its image as a global financial player. The parallels drawn to Pakistan’s financial woes further emphasize the need for introspection and swift action.
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SAT Commentaries, a collection of insightful social media threads on current events and social issues, featuring diverse perspectives from various authors.
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