This is the third and final segment of ELP's article series on Financial Action Task Force (FATF) and its significance against the backdrop of the upcoming Mutual Evaluation in India.
In the first segment of the series1, we discussed the constitution of the FATF, its role, objectives as well as assessments under FATF in certain countries. FATF and FATF-styled bodies (FSRBs) conduct periodic Mutual Evaluations for every member country and based on Mutual Evaluation Reports (MERs), countries with deficiencies and low compliance with FATF's recommendations are classified under the grey list or blacklist. The MERs also prescribe ratings to countries under the categories of i) Non-Compliant ii) Partially Compliant iii) Largely Compliant and iv) Compliant based on the compliance level of the country against specific FATF recommendations. Effectively, better compliances result in higher rating for the country. Based on such MERs, countries where deficiencies are observed are directed to comply with recommendations and follow-up reports are published based on the changes implemented (if any).
In the second segment of the series2, we discussed India's membership and Mutual Evaluation by the FATF. India became a member of the FATF in 2010 and submitted its final follow-up report in 2013 which was found to be satisfactory by the FATF. Simultaneously, in light of the MER and the FATF recommendations, India has continued making several regulatory changes in order to completely be in line with the FATF's objectives. Consequently, as compared to its 2010 MER, India's rating has strengthened over the past few years. Needless to add, there are considerable benefits of improved rankings from an economic and growth perspective.
This article deep dives into the existing regulations for anti-money laundering in India, especially for Designated Non-Financial Businesses and Professions (DNFBPs) such as bullion and jewellery industry, real estate agents, cryptocurrency exchanges etc., and also reflects on India's preparedness for its impending FATF on-site assessment in November 2023.
India's Growth Story
India is one of the world's fastest-growing economies and has made significant strides in its economic growth in recent years. Despite factors such as demonetization, introduction of GST and the pandemic, India has experienced robust economic growth over the past few decades, averaging around 7% annually.3 The Government has simultaneously implemented several structural reforms to improve business environment, attract foreign investment and stimulate economic growth. According to International Monetary Fund's (IMF) latest reports, India became the fifth-largest economy in the world. Further, according to the IMF, India will rise to fourth place in 2025 and into third place in 2027 as a USD 5.4 trillion economy.
While India has made remarkable progress in various socio-economic indicators, such as education, healthcare, and poverty alleviation, it is still considered a developing country by the United Nations. It falls under the category of "developing country" or "emerging market" due to factors such as its per capita income, infrastructure development, and social development indicators. There is also a perception of higher corruption levels. Now, given that an on-site assessment of India is due, the country is currently under the radar to improve its FATF ratings and its MER of 2023, which will consequently strengthen the flow of investments into the country and aid in economic growth.
Strengthening India's AML Regulations
Pursuant to the FATF Mutual Evaluation of India in 2010, Government agencies have expedited their efforts to further strengthen the anti-money laundering and counter-terror financing (AML/CFT) framework. The Finance Minister via a tweet stated that, "The Strategic Priorities for the FATF for 2022-24 are: Strengthen the FATF Global Network, FATF systems of Mutual Evaluations, Enhance International Beneficial Ownership Transparency, Increase Capabilities to more effectively recover Criminal assets, Leverage Digital Transformation, Ensure Sustainable Funding for FATF Strategic priorities".
Over the last few years, since the current political party came into power, the government has taken several steps to comply with FATF recommendations. Some of the major initiatives include:
- Demonetization of Indian rupee notes with denominations of 500 and 1000 in November 2016 to (i) curtail the shadow economy (ii) increase cashless transactions and (iii) reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.
- Introduction of Digital India, a campaign to improve the country's digital infrastructure and offer more government services online.
- The DigiLocker platform serves as the foundation for a "one-stop solution" for data of individuals maintained by various government agencies, regulators, and regulated entities. This simplifies the KYC process, making it faster and more efficient for consumers, further driving the growth of the digital economy in India.
- The National Payments Corporation of India has developed an instant payment system called Unified Payments Interface (UPI) to facilitate inter-bank peer-to-peer and person-to-merchant transactions. As per the report titled "The Indian Payments Handbook – 2022-27"4, UPI transactions are likely to reach one billion per day by FY 2026-27, accounting for 90 percent of the retail digital payments in the country. Moreover, UPI accounted for about 75 percent of the total transaction volume in the retail segment during 2022-23. This has significantly reduced cash transactions from the economy thereby enhancing accountability.
- The Reserve Bank of India, in 2023 has granted permission to NBFCs and payment service providers to apply for obtaining an Aadhaar e-KYC Authentication Licence which will further promote digitisation and check frauds.
- Expansion of definition of Designated Non-Financial Businesses and Professions (DNFBPs) i.e., inclusion of dealers in precious metals (DPMS), real estate agents, CA, CS and CWS, and virtual digital assets in the definition of DNFBPs under the Prevention of Money Laundering Act, 2002 (PMLA).
- The regulatory authority for DPMS and real estate agents under the PMLA is carried out by the Central Board of Indirect Taxes and Customs (CBIC) which in turn gives powers to the Director General of Audit (DGA) to issue AML/CFT guidelines. The DGA has thereafter issued the AML & CFT Guidelines for Real Estate Agents, 2022 dated 30.12.2022 and the AML & CFT Guidelines for Dealers in Precious Metals and Precious Stones, 2023 on 17.02.2023.
- The guidelines set out clear roles and responsibilities for real estate agents and DPMS which include conducting customer due diligence, maintenance of records, appointing reporting entities, reporting suspicious transactions, formation of client assessment and risk-based assessment policies, etc.
India no doubt has been making steady improvement in ensuring that its FATF's vision and mission is fulfilled, and the country gets a good risk assessment rating in the upcoming MER of 2023.
Industry Specific Regulations
The Ministry of Finance (MoF) serves as the Treasury of India and has under its purview, taxation, fiscal legislations, financial institutions, capital markets, centre and state finances and the Union Budget. The Department of Revenue under the MoF exercises control in respect of matters relating to all Direct and Indirect Union Taxes through two statutory Boards which are, the Central Bord of Direct Taxes (CBDT) and the CBIC.
MoF is also the chief regulator for AML/CFT related laws in the country. Additionally, the Department of Revenue, MoF, established the Directorate of Enforcement (ED) in the year 1956 with its Headquarters in New Delhi which is responsible for enforcement of the Prevention of Money Laundering Act, 2002 (PMLA) and Foreign Exchange Management Act, 1999 (FEMA). The MoF, from time to time comes up with various notifications to grant powers to various industry-wise regulators in the country to publish and ensure enforcement of guidelines in the financial sector.
The various industrial sectors that have been brought within the purview of PMLA and their regulations are:
Bullion and Jewellery Industry
As per the Notification No. G.S.R. 799 (E) dated December 28, 2020, the Ministry of Finance notified the inclusion of Dealers in Precious Metals and Precious Stones (DPMS) within the definition of DNFBPs in the PMLA if they engage in any cash transactions with a customer which is equal to or above INR ten lakhs, whether carried out in a single transaction or in several transactions that appear to be linked.
- Vide Notification No. G.S.R. 800 (E) dated December 28, 2020, the CBIC was appointed as the regulator for DPMS under PMLA.
- Further, the office memorandum dated November 22, 2021 was issued by the CBIC whereby the Directorate of Audit was appointed to work on behalf of the CBIC as regulator in respect of DPMS. Therefore, the DGA issued the AML & CFT Guidelines for Dealers in Precious Metals and Precious Stones, 2023 on 17.02.2023.
- As per the Guidelines, DPMS' are required to establish policies and procedures under the PMLA and apply ML/TF risk assessment in their transactions. Internal mechanisms and furnishing of information is to be undertaken by every entity and persons working within the entity.
- Cash transactions equal to or above INR ten lakhs are to be reported within a month and suspicious transactions are to be reported to the FIU-IND within 7 working days of its occurrence.
- KYC is to be conducted for every cash transaction equal to or above INR Fifty thousand as per the Rule 9(1)(b)(i) of the PMLA Rules.
- Enhanced Due Diligence (EDD) must be conducted apart from Client Due Diligence (CDD) for high-risk client, business relationships and transactions.
- These inclusions in the PMLA and efforts by the Government authorities will hopefully assist India in securing a good rating from the FATF in the upcoming Mutual Evaluation. For instance, in the UK where DPMS were regulated by His Majesty's Revenue and Customs (HMRC), the financial activity in the sector was identified to have low risk. The Responsible Jewellery Council of the UK also published a Code of Practices Guidance for the Jewellery Sector.
- The USA also has a Jewellers Vigilance Committee which provides comprehensive guidance and checklists to be followed by the players in the sector.
- However, the DPMS sector should focus on suspicious transaction reporting (STR) since the FATF has observed shortcomings in STR in various other countries such as UAE, Germany and Japan in their recent MERs.
- Moreover, South Africa has been placed in the grey list of the FATF and one of the reasons is that the potentially high-risk sectors of DPMS and Company Service Providers (CSPs) are not AML/CFT regulated, except for a general reporting obligation.
- Apart from these basic compliance requirements, DPMS must also conduct training and awareness sessions for the players in the sector. The FATF observed shortcomings with the same in Qatar vide its recent MER.
Way forward for the Indian Industry
The industry must consider the shortcomings observed by the FATF in other countries and focus on mitigating risks such as buying and selling of loose diamonds against payment other than in banking terms, using fraudulent invoices to overstate the value of jewellery, diamonds, or precious metals., etc.
Moreover, there is a need for industry oriented practical guidelines to be issued for adoption and implementation by the bullion and jewellery industry. By considering industry dynamics, such guidelines must prescribe for reasonable restrictions without hindering the flow of trade in the industry.
Real Estate Agents
The Ministry of Finance issued Notification No. G.S.R. 855 (E) dated 29.11.2022, whereby it notified that real estate agents (i) as defined under clause (zm) of section 2 of the Real Estate (Regulation and Development) Act, 2016 and as a person engaged in providing services in relation to sale or purchase of real estate (ii) having an annual turnover of INR twenty lakhs and above would be included in the definition of DNFBPs under the PMLA.
- Further, vide office memorandum dated November 22, 2021, the Directorate of Audit was appointed to work on behalf of the CBIC as regulator in respect of Real Estate Agents. Therefore, the DGA issued the AML & CFT Guidelines for Real Estate Agents, 2022 dated 30.12.2022.
- The Guidelines provide obligations for Real Estate Agents under the PMLA and Rules thereunder in line with the Risk Based Approach (RBA) adopted by the FATF for real estate agents and the recommendations made by it. These Guidelines are similar to the guidelines for DPMS as stated above.
- Other requirements are:
- Furnishing information regarding cash transactions above INR t enlakhs and other instances mentioned above to the Director, FIU-IND by the 15th Day of the succeeding month and furnishing information regarding suspicious transactions within 7 working days of its occurrence.
- Evolving internal mechanisms in line with any guidelines issued by the CBIC or the Director, FIU-IND.
- Communication of group policies, client acceptance policies and CDD measures to combat ML/TF.
- Unlike India, U.S. real estate agents and other DNFBPs involved in real estate transactions are not subject to comprehensive AML/CFT measures. Due to this, US was rated non-compliant with FATF recommendations for real estate sector.
- In Canada's 2016 MER, FIs and DNFBPs were generally observed to be subject to appropriate risk-sensitive AML/CFT supervision, but supervision of the real estate and DPMS sectors was not entirely commensurate to the risks in those sectors.
Way forward for the Indian Industry
- In light of the above, India must actively focus on the supervision of the real estate sector to mitigate risks such as undertaking of benami transactions in the name of persons who are not expected to have large amounts of wealth, mixing of illicit funds with legitimate funds, etc.
- For instance, recently the state Real Estate Regulatory Authorities (RERAs) in India have issued circulars making it mandatory for real estate agents to obtain registration by undergoing professional training and passing state examinations based on specific modules provided by the government. To increase compliance with FATF recommendations, RERA should also provide AML/CFT training to real estate agents as per the FATF recommendations and include specific modules on AML/CFT in its exam syllabus.
- Moreover, to ensure free trade while safeguarding the industry from ML/TF risks, a real estate industry practical guide applicable to not just real estate agents, but all stakeholders within the industry should be issued by the industry association. This will also bring consistency in the manner and type of records maintained by Industry members from an AML/CFT perspective and guarantee unrestricted trade for honest stakeholders.
Virtual Digital Assets
The MoF issued Notification No. S.O. 1072(E) dated 07.03.2023, whereby it notified that DNFBPs would include activities when carried out for or on behalf of another natural or legal person in the course of business as an activity for the purposes of given sub sub-clause, namely:-
- exchange between virtual digital assets and fiat currencies;
- exchange between one or more forms of virtual digital assets;
- transfer of virtual digital assets;
- safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; and
- participation in and provision of financial services related to an issuer's offer and sale of a virtual digital asset.
Since there is no centralized market regulator for crypto agencies and Virtual Digital Assets (VDA), the FIU-IND has introduced Draft AML & CFT Guidelines for Reporting Entities Providing Services Related To Virtual Digital Assets. However, the same have not been implemented yet. Under the guidelines, VDAs are required to undertake the following compliances:
- VDAs are required to register as Reporting Entities with the FIU-IND. As part of registration, they must disclose their account details with Banks/FIs where they hold accounts for transactions as well as for holding of Client Money.
- Implement internal policies, procedures and controls, appoint designated directors and principal officers, conduct training, conduct internal control/audit, follow KYC norms, CDD, EDD, and report suspicious transactions etc. similar to the other guidelines for DPMS and real estate agents.
The Indian Government must aim to implement these guidelines soon since many other countries are already compliant with the FATF requirements for VDAs.
In the UK, the Financial Conduct Authority has acted as the AML/ CTF supervisor of UK businesses conducting or intending to conduct crypto asset activity. It also provides a general checklist for registration of crypto assets.
The FATF, in its 2022 MER of the Netherlands, observed that the understanding of ML risk for FIs and virtual asset service providers (VASPs) is generally good, and policies and procedures are in place and commensurate to risks.
Way forward for the Indian Industry
In India, many crypto exchanges are already (voluntarily) complying with certain baseline KYC norms and also reporting of suspicious transactions. A uniform standard for all market players, however, would be useful. Suspicious transactions such as cross-country benami i.e., converting cryptocurrency into cash in a foreign currency, purchases from 'dark web' marketplaces, etc. need to be regulated by the associations and regulatory bodies.
However, since there is no centralized market regulator for the crypto industry, the stakeholders are wary that investigative agencies (like the ED- Directorate of Enforcement ) could become the primary watchdog for the crypto economy. Framing of certain common practical guidelines uniformly adopted by the industry would facilitate creation of a framework for compliance by players within the crypto industry.
The definition of DNFBPs was included vide PMLA amendment of 2009 where casinos were brought under the scope of reporting entities. Moreover, in terms of Rule 9 (7) of the PML Rules, the Goa Anti Money Laundering and Financing of Terrorism Guidelines (Goa AML Guidelines) were issued to regulate the casino sector and bring it in line with the FATF recommendations. The Government of Sikkim also issued AML/CFT guidelines for casinos operating in Sikkim in September 2011 under the Sikkim Casino Games (Control and Tax) Act, 2002.
Apart from the general AML/CFT guidelines issued by other sectors, the Goa AML Guidelines provide the following:
- Identification of high-risk customers, i.e., customers may become high spenders because of their cumulative spending over a period of time. Also, customers who gamble large amounts of money on limited occasions or even during a single visit are to be considered as high-risk customers. If the customers' spending patterns change dramatically and their play does not fit their playing profile or if they collect huge winnings back in cash instead of normal banking transactions, they may be considered as high-risk customers. Junket operators, customers with multiple casino player rating accounts and unknown customers are also to be considered as high-risk customers.
- Casinos are supposed to conder a wide range of variables such as size of premises, customer profile, speed and volume of business, types of payment, types of gambling offered, etc. while identifying risks.
In India, there is no central authority governing the casino industry as of now.
Unlike in India, the UK Gambling Commission has a wide checklist of considerations which ensure that the developments in the Gambling sector are compliant and will help to deliver the licensing objectives of the Gambling Act. Due to this, the FATF considered UK to have a good understanding of risks in the gambling sector.
Similarly in the USA, Casinos are subject to a robust AML/CFT regime, and in recent years, this sector has had an increased focus on preventive measures. The American Gaming Association also issues AML/CFT guidelines apart from compliance requirements under the Banking Secrecy Act.
Way forward for the Indian Industry
Indian Casinos should voluntarily devise internal guidelines for mitigating risks of money laundering, by setting up a SOP for identifying suspicious transactions, and various compliances to be followed by casinos under the AML regulations.
Chartered Accountants, Cost Accountants and Company Secretaries
The Ministry of Finance issued Notification No S.O. 2036(E) dated 03.05.2023 whereby it notified that DNFBPs would include financial transactions carried out by a relevant person on behalf of his client, in the course of his or her profession, in relation to the following activities-
- buying and selling of any immovable property;
- managing of client money, securities or other assets;
- management of bank, savings or securities accounts;
- organization of contributions for the creation, operation or management of companies;
- creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities
However, the Ministry has not yet issued any further notifications appointing a regulator in this regard and no guidelines have been issued for this sector of DNFBP yet.
The FATF in its August 2022 MER of Germany observed that there are no market entry checks for the trust and company service provider (TCSP) sector and noted that as a shortcoming for the sector. Even in South Africa Company Service Providers (CSPs) were not AML/CFT regulated apart from having general reporting obligations and the same was one of the many reasons why South Africa was put in the FATF grey list.
Way forward for the Indian Industry
Indian institutes for Chartered Accountants, Company Secretaries and Cost Accountants should endeavor to undertake training sessions for professionals to educate them with respect to compliances to be undertaken, specifically focusing on the industry dynamics and setting internal standards.
To comply with the FATF's recommendations and to get an overall good rating, all regulated entities, reporting entities and regulators must continue to share up-to-date risk assessments as widely as possible with relevant stakeholders, conduct training and awareness exercises for all governed industries and report STRs and CTRs.
Industry Associations and regulatory bodies of which various DNFBPs are members, need to take up the onus of issuing detailed guidelines while taking into consideration the industry specifics and practical issues being faced. Moreover, guidelines should be drafted in a manner which will not impede and dissuade businesses. Consistency of record keeping and correct compliance procedures ultimately leads to an effective reporting mechanism with a faster response time to enquiries by the AML regulators/ monitoring authority. Globally, this task of issuing implementable procedural guidelines has been taken up by industry associations and acknowledged by regulatory authorities. India has a considerable gap to fill to implement these practical approaches and the impending MER 2023 could be the perfect opportunity for industry associations to take up this onus.
To ensure that the FATF gives a favourable observation, the government needs to also ensure that technical and effective compliances of the regulations which counter anti-money laundering are in place. While adoption of new guidelines and risk assessments by Indian sectors demonstrate the clear impact of the FATF's assessment process in 2010, there are still some sectors where AML/CFT frameworks are in the initial stages of development.
In light of the upcoming on-site assessment, the regulatory sectors, reporting entities and designated entities in India are under high levels of scrutiny. Indian authorities must keep in mind the actions taken by the FATF against other countries that have already undergone assessment and rely on the practical guidelines provided to them in that regard to perform better in its upcoming on-site assessment.
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