Why in the News?

The FATF placed India in the “regular follow-up” category for having an “effective” anti-money laundering and counter-terror financing system but highlighted the need for significant improvements in prosecuting such cases.

Key Highlights of the FATF Mutual Evaluation Report on India:

• “Regular Follow-up” Category: India has been placed in the “regular follow-up” category, signifying that its system for combating money laundering and terror financing is effective.
  • Financial institutions need better risk profiling of customers, and the Ministry of Corporate Affairs (MCA) registry needs improved monitoring for accurate ownership information.
• Money Laundering Risks: The primary sources of money laundering in India come from fraud, cyber-enabled fraud, corruption, and drug trafficking.
  • Terror threats are mainly linked to Islamic State or al-Qaeda groups in Jammu and Kashmir.
• Non-Profit Organisations (NPOs): India should strengthen measures to prevent abuse of the NPO sector for terror financing, and enhance outreach to NPOs at risk.
• Improvements in Sanctions Framework: India needs to improve its targeted financial sanctions framework to ensure the timely freezing of funds and assets related to terror financing.
• Domestic Politically Exposed Persons (PEPs): The report urged India to define domestic PEPs under its anti-money laundering laws and improve identification and risk-based measures related to them.
• Delay in prosecution: The report noted delays in prosecution due to review petitions are still pending, which delays the resolution of cases under the PMLA.

Challenges faced by the Indian Government:

• Prosecution and Conviction Delays: Despite an increase in investigations, the number of prosecutions and convictions remains low, with significant delays in concluding trials, especially under the PMLA.
• Constitutionality Issues: Legal challenges to the constitutionality of the PMLA between 2014-2022 disrupted the momentum in terror financing and money laundering prosecutions.
• Risk Profiling of Financial Customers: There is a need for better risk profiling of customers in financial institutions to address money laundering more effectively.
• Inaccurate Ownership Information: Ensuring accurate owner information in the Ministry of Corporate Affairs (MCA) registry remains a challenge, especially concerning investments from tax havens.
• Non-Profit Organisations: Ensuring that non-profits are not abused for terror financing requires better coordination and focused outreach by authorities.
• Lack of Definition for Domestic PEPs: While India has defined foreign PEPs, the absence of a clear definition for domestic PEPs under PMLA creates a gap in the anti-money laundering framework.
• Fast-Tracking Trials: The need to fast-track trials in money laundering and terror financing cases is recognized, but progress in addressing this challenge remains slow.

Way Forward: 

• Strengthen Legal and Institutional Framework: India should establish clear definitions for domestic Politically Exposed Persons (PEPs) under anti-money laundering laws and enhance targeted financial sanctions to ensure timely asset freezing.
• Enhance Risk Management and Monitoring: Financial institutions should improve risk profiling and implement stricter Know Your Customer (KYC) processes, while the Ministry of Corporate Affairs should ensure accurate ownership data, especially for investments from tax havens.

Mains PYQ:

Q Discuss how emerging technologies and globalisation contribute to money laundering. Elaborate measures to tackle the problem of money laundering both at national and international levels. (UPSC IAS/2021)

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