On 19 September 2024, the Financial Action Task Force (FATF) released its Mutual Evaluation Report (MER) on India, marking a critical moment for the country’s financial system. The comprehensive evaluation, conducted during the FATF plenary session in Singapore in June 2024, outlined a series of challenges that India must address to strengthen its Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) frameworks. The report highlighted several key areas where India is falling short, making it a global concern, particularly in the eyes of international financial institutions (IFIs). As India faces increasing scrutiny, addressing these issues is vital not just for its domestic financial integrity but for its position on the international stage.
The report places India under “regular follow-up,” requiring the country to submit a progress report by October 2027. This categorization signals FATF’s concerns over India’s ability to meet international standards. While the MER acknowledged some progress, the deficiencies outweigh the achievements. A major area of concern is India’s handling of terrorist financing. The report highlighted that extremist groups, including left-wing insurgencies, ISIL, and Al-Qaeda, are managing to collect and funnel funds within the country, exploiting gaps in the system.
A significant issue raised in the report is the vulnerability of Non-Profit Organizations (NPOs) to terrorist financing. NPOs, often registered as charitable organizations, have been evading tax regimes, making them attractive channels for illicit financing. This loophole has not been adequately addressed by Indian authorities, leaving the sector highly vulnerable to exploitation by terrorist groups. The regulation of politically exposed persons (PEPs) is another critical shortfall identified by FATF. The report points to non-compliance by PEPs, particularly with respect to sources of wealth, money trails, and beneficial ownership transparency. Domestic PEPs, in particular, face lax oversight, creating opportunities for corruption and money laundering.
Another pressing issue is the regulatory framework surrounding Designated Non-Financial Businesses and Professions (DNFBPs). FATF pointed out that gaps exist in the regulation of DNFBPs, making these sectors prone to money laundering and terrorist financing activities. Businesses dealing with precious metals and stones (PMS) also contribute to the problem, with the gems and jewelry market being a significant conduit for illicit activities. FATF’s evaluation of India’s regulatory measures in this sector revealed significant weaknesses, particularly in terms of monitoring and control.
India’s digital economy is also under the spotlight. Fraud in cash-based transactions, as well as drug trafficking, are primary sources of money laundering within the country. Cybercrimes have surged in India, and while the government has taken some steps to combat this growing threat, FATF has called for more robust measures. The report also criticized India’s handling of human trafficking and drug-related offenses, pointing out the delays in prosecuting money laundering cases related to these crimes.
FATF has issued several recommendations aimed at addressing these challenges. One of the most pressing is the need to expedite the pending money laundering trials, as delays only exacerbate the problem. FATF has also called for targeted financial sanctions, urging India to improve its framework to ensure that funds and assets can be frozen without delay. The report highlighted that communication regarding sanctions is not streamlined, causing further delays and inefficiencies in the process.
India also needs to define domestic PEPs under its AML laws and implement risk-based enhanced measures for them. Currently, the lack of clear definitions and regulations around domestic PEPs allows for significant loopholes in financial oversight. Additionally, FATF stressed the importance of conducting a comprehensive risk assessment of India’s financial institutions and NPOs. Without a thorough understanding of the vulnerabilities in the system, India will continue to struggle to implement effective safeguards.
The report also emphasizes the need for stronger customer due diligence (CDD) obligations to prevent money laundering and terrorist financing. FATF has recommended that India improve the reliability of identification documents to prevent identity fraud, which has been a persistent problem in the country. The Suspicious Transaction Report (STR) reporting regime is another area where India needs to improve. FATF noted that the current system is not robust enough, with many suspicious transactions going unreported or unaddressed.
FATF’s MER is a wake-up call for India. The country’s financial system faces numerous vulnerabilities, from terrorist financing to money laundering via NPOs and DNFBPs. Addressing these gaps is not just a matter of domestic concern but is crucial for maintaining India’s standing in the global financial community. IFIs, investors, and other international actors will be closely watching India’s progress. Failing to address these issues could have severe consequences, not only for India’s economy but also for its political and security landscape. The next few years will be pivotal in determining whether India can rise to the challenge or remain a weak link in the global fight against money laundering and terrorist financing.