In the first part of this three article series, we discussed the essence and magnanimity of the Financial Action Task Force (FATF) as the global regulator of member countries for combating money laundering and terrorist financing. We also touched upon the constitution, role and responsibility of FATF and the benefits that member jurisdictions gain by being a part of FATF. Undoubtedly India is a prominent member of FATF and therefore abides by its regulations and also reaps the benefits deriving from the same.
However, it is crucial that we understand India's journey into being a full-fledged member of the FATF in light of its history, with a view to better envisage and project the future implications/repercussions for India.
JOINING THE ASIA PACIFIC GROUP (APG)
Like most other countries, India's journey into FATF also commenced by becoming a part of a FATF - styled body (FSRB), APG, in March 1998. The political declaration adopted by the special sessions of the United Nations General Assembly held in June 1998 of which India was a member state, required all participating jurisdictions to adopt money laundering legislations and implement thorough procedures for administering the same. Being part of the FSRB and with a view to becoming a member of FATF, India was required to take various initiatives towards strengthening its internal legal eco-system to prevent money laundering. Thus, India promulgated the prevention of money laundering act 2002 PMLA which came into effect in 2005.
As a step towards enabling India to become member of FATF, the first mutual evaluation was conducted by the APG in 2005 and Mutual Evaluation Report (MER) for India was adopted by the APG plenary in 2006. Major recommendations of the MER of 2005 were:
- To make the Financial Intelligence Unit (FIU) operational in India.
- To set unified standards for customer due diligence (CDD) in the financial sector.
- To prescribe obligations for suspicious transactions reporting (STR) on relevant authorities in the financial sector.
- To include real estate agents, dealers in precious metals and precious stones (DPMS), lawyers and accountants under the definition of Designated Non-financial Businesses and Professions (DNFBPs).
However, not all suggested recommendations could be implemented by India as set out in the APG MER. Still, considering India's significance as a global economy, FATF gave India the status of an "observer". This marks the initiation of India becoming a full-fledged member of the FATF. This in turn devolved upon India the responsibility to adopt the 40+9 recommendations issued by the FATF.
In November – December 2009, with a view to confer upon India a full membership to the FATF, an onsite assessment of India's compliance with the 40+9 recommendations of FATF was carried out by a joint mutual evaluation team of the FATF / APG. A MER on India was published on June 24, 2010, which was discussed at the FATF plenary, and based on the same, India was admitted as the 34th member of the FATF on June 25, 2010. This clearly reflects a proud moment for India as emphasized by the Ministry of Finance which in its press release dated June 29, 2010 stated that, "FATF membership is very important for India in its quest to become a major player in the international finance. It will help India to build the capacity to fight terrorism and trace terrorist money and to successfully investigate and prosecute money laundering and terrorist financing offences. India will benefit in securing a more transparent and stable financial system by ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups. The FATF process will also help us in co-ordination of AML/CFT efforts at the international level."1
In December 2010, India become a part of the Eurasian group (EAG) another FSRB, mainly comprising of developed European nations. This was aimed to enable India to learn from its member nations and further strengthening its own Anti-Money Laundering (AML) regime.
In view of the MER 2010, India undertook to strengthen its AML/Combating of Financing of Terrorism (CFT) regime and accordingly presented an action plan. Various initiatives were taken by India during the period 2010 to 2013, which were reported to the FATF plenary till June 2013. It is significant to note that based on such reporting, India was conferred a status that it had reached a satisfactory level of compliance with respect to all core and key recommendations.
In this article, we will discuss certain crucial initiatives adopted by India to achieve the relevant recommendations of MER 2010 and the benefits that were sought to be unearthed by implementing such regulatory measures.
PREVENTION OF MONEY LAUNDERING ACT, 2002
In pursuance of the aforementioned political declaration adopted by the Special Session of the United Nations General Assembly, in 2002, the Indian Parliament enacted the Prevention of Money Laundering Act, 2002 (PMLA, 2002/ PMLA) which came into effect on July 1, 2005. The objective for implementation of the PMLA, 2002 was to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.
It is a comprehensive legislation inter alia aimed at:
- preventing money-laundering and connected activities;
- confiscation of proceeds of crime, setting up of agencies; and
- mechanisms for coordinating measures for combating money-laundering, etc
PMLA, 2002 initially prescribed a monetary threshold of Rs. 30,00,000/- for several offenses covered thereunder, which was criticised by the FATF in India's MER 2010. Accordingly, Recommendations 1 and 2 of the MER proposed doing away with a monetary threshold to bring the definition of money laundering in line with the Vienna and Palermo Conventions.
Recommendation 1 of the MER also suggested that the definition under Section 3 of the PMLA regarding offence of money laundering should be brought in line with the Vienna and Palermo Conventions so as to fully cover physical concealment as well as acquisition, possession and use of all relevant proceeds of crime. Further, Recommendation 3 of the MER suggested that confiscation of property laundered should be specifically covered under PMLA, and such confiscation should not be dependent on conviction of a person for a scheduled offence under the PMLA.
By an amendment in 2012, the aforementioned lacunae under Recommendations 1 and 2 were resolved. This amendment did away with the monetary threshold for offences under the PMLA and enlarged the definition of offence of money laundering in Section 3 of the PMLA to include therein the activities like concealment, acquisition, possession and use of proceeds of crime as criminal activities.
Similarly, as far as the requirement of conviction under a predicate offense for confiscation of property under the PMLA is concerned, the same was also addressed by the same amendment of 2012. Sections 5 and 8 of the PMLA were amended to ensure that the pre-requisite of conviction under a predicate offense for confiscation of property was done away with, and such confiscation is now dependent on registration of predicate offence investigation at a judicial level, either in India or in any other country.
The above amendments, alongwith widening of ambit of DNFBPs covered under PMLA, and undertaking of stringent monitoring and supervising of anti-money laundering laws by regulatory bodies in India, which is dealt with in detail in the latter part of this article, various recommendations of the FATF provided in the MER, 2010 were considered to have been largely complied with.
The amendments undertaken pursuant to the FATF recommendations has enabled India to implement robust anti-money laundering laws in India. As per the latest available Government data, as on January 31, 2023, a total of 1142 prosecution complaints have been filed. The proceeds of crime of Rs. 15,623.68 Crores have been identified and confiscated the PMLA out of which substantial part of attached proceeds of crime are still under adjudication by the Adjudicating Authority. In addition to this, property having the value of Rs. 862.43 crore has already been confiscated to the Central Government under the orders of the competent court.2
FINANCIAL INTELLIGENCE UNIT – INDIA (FIU – IND)
For effective implementation of the PMLA 2002, a central Financial Intelligence Unit – India (FIU-IND) was established in 2004, which centralises and coordinates most of India's AML/CFT strategies.
The FIU-IND was set up by the Indian government vide O.M. dated November 18, 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and financing of terrorism. The FIU-IND has been made a fully functional body in line with the recommendation of APG MER and FATF Recommendation 26.
FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. Section 13 of the PMLA provides the FIU-IND with the statutory basis upon which to access financial, administrative and law enforcement information from various sources for analysis of STRs (Suspicious Transaction Reports) and processing of references received from other agencies. The main function of FIU-IND is to receive cash/suspicious transaction reports, analyse them and, as appropriate, disseminate valuable financial information to intelligence/enforcement agencies and regulatory authorities .
The functions of FIU-IND are:
- Collection of information: Act as the central reception point for receiving Cash Transaction reports (CTRs), Non-Profit Organisation Transaction Report (NTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs) from various reporting entities;
- Analysis of information: Analyse received information in order to uncover patterns of transactions suggesting suspicion of money laundering and related crimes;
- Sharing of information: Share information with national intelligence/law enforcement agencies, national regulatory authorities and foreign Financial Intelligence Units;
- Act as central repository: Establish and maintain national data base on the basis of reports received from reporting entities;
- Coordination: Coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes;
- Research and Analysis: Monitor and identify strategic key areas on money laundering trends, typologies and developments.
The Section 66 of the PMLA allows dissemination of information by FIU-India to any officer, authority or body performing any function under any law relating to AML/CFT notified by the Central Government.
Further, the Strategic Analysis Lab of FIU-IND (SAL) conducts sample studies on various reports submitted by the reporting entities and identifies the compliance gaps in them. It also helps in identifying new money laundering patterns and modify/create new scalable statistical models and algorithms.
- With the help of SAL, in FY 21-22, an analysis of STRs pertaining to virtual assets or cryptocurrencies led to recognition of several fraudulent schemes using virtual currencies. Usage of international e-wallets or virtual prepaid cards was also observed which has helped in understanding regulatory issues in the virtual assets sector.
ENFORCEMENT AND REGULATORY BODIES UNDER PMLA
Enforcement Directorate (ED)
Under the PMLA, 2002, Enforcement Directorate has been appointed as the enforcement body and has been granted wide powers. It possesses powers to undertake survey, search, seizure as well as attachment of property, arrest and imposition of fines and penalties. It is also the adjudicating authority under PMLA. Accordingly, in relation to all scheduled offences under the PMLA, 2002, powers to take action are with the Enforcement Directorate.
Reserve Bank of India (RBI)
The RBI has taken the following steps in order to meet the objectives of the PMLA:
- The RBI issued KYC guidelines in 2013 setting AML/CFT standards and procedures for conducting CDD for banks, which refers to the Indian Banks' Association's (IBA) guidance note on KYC norms and AML standards which was published in July 2009. The guidance note provided an indicative list of high-risk customers, products, services, and geographies which must be kept in mind by banks for their own risk assessment.3 Moreover, RBI advised banks to take into account risks arising from deficient/high risk jurisdictions identified by the FATF Plenary from time to time.
- The RBI vide its guidelines for investment in entities from FATF non-compliant jurisdictions dated June 14, 2021, prohibited investors from FATF non-compliant jurisdictions from acquiring 'significant influence' i.e., equal to or above 20% voting power, in payment service operators (PSO).4
- The RBI, vide Notification dated September 13, 2021 empowered entities other than banking companies under Section 11A of the PMLA to carry out e-KYC/Aadhar authentication of the clients and invited applications for the same from NBFCs, Payment System Providers and Payment System Participants. Thereby, vide notification dated May 4, 2023, the RBI permitted 22 entities to carry out e-KYC/Aadhar authentication of their clients under the PMLA.
Securities and Exchange Board of India (SEBI)
The SEBI issued guidelines dated February 3, 2023, on AML/CFT obligations of securities market intermediaries under the PMLA and Rules, whereby it identifies clients from high-risk countries, Politically Exposed Persons (PEPs), NPOs and companies having beneficial ownership as 'clients of special category' and required intermediaries to conduct enhanced due diligence (EDD) for such clients.5
The SEBI had also published a circular in December 2022 on foreign investment in alternative investment funds (AIFs) and thereby prohibited investors from high-risk countries as per the FATF from acquiring 25% or more in AIFs.6
The Central Board of Direct Taxes (CBDT)
CBDT, the Central body responsible for implementation of Direct taxes, is responsible for monitoring PEPs, very High Net-Worth Individuals (VHNIs) and High Net-Worth Individuals (HNIs) to reduce tax risks and deepen the tax base in such groups of taxpayers. The CBDT also exchanges information with the FIU-IND and other regulators in order to increase coordination. It also monitors matters related to the FATF and other bodies dealing with AML/CFT having effect on direct taxes.7
The Central Board of Indirect Taxes and Customs (CBIC)
The CBIC has been designated as the regulatory body for DPMS and the real estate sector, as these sectors are covered under the ambit of DNFBPs under the PMLA. In light of this, the CBIC has issued AML/CFT guidelines for both sectors. The AML/CFT guidelines for Real Estate sector dated May 4, 2023 prescribe for categorization of clients into high-risk and low-risk based on their location, nature of business, trading turnover, etc., and directs the reporting entities to conduct risk assessment of clients who are non-resident, HNI, trusts, charities, NGOs, etc.8
Guidelines for DPMS are also exhaustive in nature, and require various compliances to be undertaken by DPMS, where they undertake cash transactions exceeding Rs. 10,00,000/- with a customer, whether in one single transaction or multiple transactions which are connected.
Insurance Regulatory and Development Authority (IRDA)
The IRDA vide its Master Guidelines on AML/CFT dated August 1, 2022, required insurers to conduct EDD while taking insurance risk exposure to individuals/entities connected with high-risk countries identified by the FATF. Insurers were also directed to go beyond FATF statements and apply publicly available information when identifying high-risk countries.9
BUSINESSES COVERED UNDER PMLA
Initially, the PMLA covered financial institutions and intermediaries (such as stockbrokers, share transfer agent, stock exchange) etc. Thereafter, casinos were included as a DNFBP vide amendment to the PMLA, 2002.
Widening of sectors covered under the DNFBP
The FATF, in its MER, 2010 specifically highlighted that apart from Casinos, the PMLA, 2002 did not apply to any of the DNFBP Sector. Accordingly, vide the PMLA Amendment Act, 2012, the ambit of PMLA Act, 2002 was expanded to real estate, agents/sub-registrars in charge of registering properties, DPMS and safe deposit keepers. Futures brokers were also specifically covered under the ambit of PMLA, 2002. The amendment also contains a provision to expand the ambit of the PMLA to other DNFBP sectors as and when required.
DNFBP ambit further widened in 2023
As per the risk assessment carried out by India during the follow up rounds with FATF post MER, 2010, India did not include lawyers and accountants under the DNFBPs since they posed a low risk on money laundering. However, recently, vide a Notification dated May 3, 2023, Chartered Accountants, Company Secretaries and Cost Work Accountants have been included as DNFBPs in case they undertake transactions specified therein, such as buying/selling immovable property, managing client money, securities, or other assets. Prior to this, vide Notification dated March 7, 2023, cryptocurrency exchanges have been included as DNFBPs.
Compliances for DNFBPs covered under PMLA
The DNFBPs notified under the PMLA, 2002 are required to undertake several compliances under the PMLA (Maintenance of Records) Rules, 2005 [PMLA Rules] such undertaking KYC compliances, reporting of suspicious transactions, furnishing cash transaction reports and counterfeit currency reports etc. to FIU-IND. Non-compliance under the said Rules is considered to be a separate violation, which may lead to imposition of fines not less than Rs. 10,000/- but which may extend to Rs. 1,00,000/- for each such failure.
The above provisions have been implemented to ensure that high-risk sectors such as casinos, real estate, DPMS etc., through which proceeds of crime can be laundered, are also effectively regulated, to enable the regulatory as well as enforcement authorities to identify suspicious transactions.
Recent amendments to PMLA Rules
Recently, the PMLA Rules were amended in 2023, whereby the Government made it mandatory for banks and financial institutions to record financial transactions of PEPs and to provide information about transactions with NPOs. Details of the NGO clients would have to be uploaded in the 'Darpan Portal' of the Niti Aayog and the record would be maintained for up to 5 years after the business relationship has ended. Such information will also have to be shared with the ED as and when sought.
Moreover, by way of the abovementioned amendment, PMLA Rules tighten the definition of beneficial owners under the AML laws i.e., define beneficial owner as an individual/group holding 10% ownership in a client's business, and require the reporting entities to undertake enhanced due diligence in such cases.
Thus, under the PMLA Act read with the PMLA Rules, several responsibilities have been placed not only on the financial institutions such as banks, stock exchanges etc., through which monetary transactions are usually undertaken, but also the DNFBPs which mainly includes sectors such as real estate, casino, DPMS etc., which are vulnerable to money laundering activities. Several responsibilities and compliances have therefore been imposed on such sectors and ample powers have been provided to FIU-IND to ensure that such compliances are followed, including granting of powers to impose fines in case of breach of such compliances.
MUTUAL EVALUATION OF 2023
India now sits at the cusp of undergoing another mutual evaluation of the FATF scheduled during this year.
India's next mutual evaluation by the FATF is likely to take place in November 2023 and in that regard, according to reports, the process has already begun. The technical compliance submissions have been made on May 5, 2023, and thereafter the effective annex submissions are scheduled on the July 14, 2023. Post the on-site assessment, the FATF Plenary discussion is scheduled in June 2024.
During such evaluation various critical aspects are expected to be evaluated to determine India's position on various recommendations and further improvements to be carried out, including assessment of applicable legislations such as PMLA Act, PMLA Rules, Unlawful Activities (Prevention) Act, 1967 etc., and effective implementation of such laws. As per the trends observed in the MER published for countries that have undergone the 4th Mutual Evaluation round of FATF, it appears that the focus has been towards effective implementation of anti-money laundering provisions applicable to DNFBPs. This will also include evaluating measures taken by Government and regulatory bodies, as well as industry associations to create awareness amongst relevant DNFBPs to undertake effective compliances under the anti-money laundering provisions.
Having successfully implemented the recommendations of MER, 2010, and with robust AML/CFT eco-system in place, India is considered to be a part of the group of nations that are effectively fighting against the menace of money laundering and terrorist financing. Being a part of FATF grants legitimacy to India's political efforts, especially those related to countering of terrorist financing activities in its neighboring countries. This has been an impressive journey for India, where from being a brutal victim of money laundering and terrorist financing, it is now recognized as a nation with an effective and robust AML/CFT eco-system.
A positive rating in the upcoming FATF Mutual Evaluation will be a crucial next step for India, to establish itself as a strong member of the global AML/CFT watchdog. Therefore, the industry bodies, especially those covered under DNFBPs should be agile and proactive to ensure that the industry players are well aware as well as well-equipped to undertake all necessary compliances under the PMLA and its allied rules.
In the next article we will now dwell upon how the Government should give a final touch to ensure India's thorough compliance to the recommendations, how various industry bodies should undertake surveys and knowledge sharing sessions to ensure proper adoption of practices by member businesses and how businesses should structure their internal operations to ensure compliance with applicable regulatory requirements.
2. https://enforcementdirectorate.gov.in/statistics-0 , last accessed on 9th June 2023
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