India has an unfinished agenda on countering money laundering & terrorism financing

FATF’s last follow-up report on India indicated that the country had made significant progress on all core and key recommendations and was consequently removed from the regular-follow up process.

India is due for its Financial Action Task Force (FATF) review later this year. The recent legal and regulatory changes implemented to further improve financial governance and combat money laundering can be seen in this light. More changes are imminent in the run-up to the review, in line with the FATF recommendations, which have expanded significantly in scope and scale since India’s first FATF review in 2010. Performance in the FATF review is reflective of a country’s preparedness to tackle and prevent illegal actions like financing terrorism, proliferation financing, financial cyber-crimes, etc.

As the fastest-growing economy, India is one of the most attractive investment destinations for foreign direct investment (FDI) and foreign institutional investment (FII) and is deeply integrated with the international financial system. Additionally, India has the highest volume of digital transactions in the world. The increasing value and volume of transactions across jurisdictions, growing sophistication of financial systems and flows, and emergence of financial instruments that transcend jurisdictional boundaries, aided by significant technological developments, pose various complications and risks that require collaborative international regulations and their implementation to safeguard against nefarious players.

A strong Anti-Money Laundering (AML)/ Combating the Financing of Terrorism (CFT) regime is not only important for India from a domestic policy standpoint but also for enhancing its international standing. Complying with FATF recommendations is accordingly high on India’s priority list.

India has implemented and enacted several AML/ CFT laws and policies, including the PMLA, the Unlawful Activities (Prevention) Act (UAPA), the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act (WMDA), both before and after becoming a member in 2010, which have been followed by regular amendments. FATF’s last follow-up report on India indicated that the country had made significant progress on all core and key recommendations and was consequently removed from the regular-follow up process.

Measures Implemented

The Indian government and regulators have worked in tandem to further address FATF recommendations. This highlights the country’s commitment to ensuring that regulatory gaps are duly addressed. Notable regulatory changes made in recent months include:

— The expansion of the PMLA’s ambit in May 2023 to include new classes of persons such as chartered accountants, company secretaries, cost and works accountants, directors, partners, company/ LLP formation agents, etc.

— The amendment of the know your customer (KYC) norms by RBI inter alia to bring more clarity on the meaning of beneficial owner, shell banks, obligations of regulated entities (REs) in relation to employing new technologies, adding certain additional obligations and compliance requirements on banks, financial institutions and other REs, vis wire transfers.

— Foreign portfolio investors (FPIs) were mandated by SEBI to report any material change in information, including any direct or indirect change in its structure or ownership or control or investor group within two days, down from seven days previously.

— Persons from FATF non-compliant jurisdictions were prohibited by the RBI from acquiring major shareholding in a banking company, while existing major shareholders from such jurisdictions were allowed to continue, provided there is no further acquisition without prior RBI approval.

— IRDA issued consolidated Master Guidelines on AML/ CFT, applicable to all classes of life, general or health insurance businesses last year.

— Stock exchanges were required to look into appropriate systems and procedures that complied with FATF standards while framing guidelines regarding eligibility criteria for authorised stock brokers (ASBs).

Unfinished Agenda  

While India has largely complied with the FATF recommendations, further steps would be required for absolute compliance. We expect the government and regulators to issue further AML/CFT-related directions, circulars, instructions, etc, between now and the FATF review date. The government may take steps to expedite and streamline processes to ensure higher rate of disposal of cases under the PMLA. Currently, there are a few challenges with PMLA enforcement.

Secondly, taking a cue from the UK’s legislation on Designated Non-Financial Businesses and Professions (DNFBPs), notaries and lawyers may also be brought within the ambit of PMLA. Thirdly, the RBI may issue guidelines, which would include strict capitalisation norms and due diligence requirements for digital payment companies offering merchant payments through POS terminals. Fourthly, the RBI may extend the KYC requirements for transactions carried out via credit card, debit card and prepaid payment instruments (PPI). While KYC norms are complied with at the time of issuing debit cards/ credit cards/ PPIs, the RBI may still bring each transaction or transfer carried out via these instruments within the scope of its regulations. However, the RBI would need to address certain implementational challenges, which would require stakeholder input.

India’s compliance with the FATF recommendations is still ahead of several developed jurisdictions. While the steps taken by the government will instil further confidence in India’s AML/ CFT regime, additional safeguards as discussed above will bring India at par with jurisdictions like the UK, which has one of the highest levels of compliance.

(With contribution from Shatrajit Banerji, Principal Associate, Cyril Amarchand Mangaldas.)

Anu Tiwari & Pallavi Singh Rao are Partners, Cyril Amarchand Mangaldas. Views are personal, and do not represent the stand of this publication.