Anti-Money Laundering Framework in India

Total black money in Swiss banks is estimated to be about 13 times India’s foreign debt of about 1500 billion dollars – about USD 20,000 billion.

Money laundering and corruption are intrinsically linked. Bribery and misappropriation of public funds lead to money laundering – it is defined as the process of concealing illicit gains that were generated from criminal activity. Through successfully laundering the proceeds of a corruption offence, the illicit gains may be enjoyed without fear of being confiscated.

Money laundering broadly means the conversion or “Laundering” of money that is illegally obtained, so as to make it appear to originate from a legitimate source. It was originally used in the context of terrorist, criminal, smuggling and drug-dealing activities, however, in a wider context it also covers the money obtained through tax-evasion.

Combating money laundering is crucial for the broader agenda of fighting organized crimes such as terrorism or drug trafficking. It involves plugging loopholes in the laws on the one side and prosecuting those involved in the process of laundering.

The Prevention of Money Laundering Act, 2002 (PMLA)

InIndia, The Prevention of Money Laundering Act, 2002 (PMLA) was created as a principal weapon against money laundering. It forms the core of the legal framework to combat money laundering and was initially focused on banking companies, financial institutions and intermediaries by administering KYC and other reporting requirements such as suspicious transactions reporting, etc. Later it was amended to cover NGOs also.

Under the PMLA, the Financial Intelligence Unit (FIU) scrutinizes the records to spot suspicious transactions and then the Enforcement Directorate (ED) goes ahead with investigation and prosecution. As on March 2011, the Ed was investigating 1269 cases of money laundering, of which 11 fell under the Unlawful Activities (prevention) Act.

Financial Action Task Force (FATF)

This law was created under the aegis of Financial Action Task Force (FATF) which is an inter-governmental “policy making body” designed to develop and promote policies, both at national and international levels, to combat money laundering and terrorist financing. As part of the global initiative, a Financial Action Task Force (FATF) was created in 1989 to help member countries draw up Anti-Money Laundering (AML) legislation. FATF is also known by its French name, Groupe d’action financière (GAFI). The FATF clearly recognizes the connection between corruption and money laundering.

After the 9/11 attack in US, the FATF became all the more important as an important tool to deprive the terror outfits of their funding sources. The FATF is neither a permanent body nor has a rigidly defined constitution. In 2004, representatives from the 35 FATF members agreed to extend the mandate of the Task Force until 2012 – this clearly speaks for the confidence FATF enjoys as an important instrument in fight against terrorism and international crimes.

India become the 34th country member of the Financial Action Task Force in June 2010, after preparing itself for membership since 2009 membership by taking necessary steps to meet FATF’s requirements. It amended or instituted necessary legislations fulfilling the guidelines of FATF. With this membership India will have an easy access to information on suspicious financial transactions in other countries includingSwitzerland,China, theU.S.and the U.K to trace the black money stashed away in tax havens. This also putIndiainto one of the most critical standards-setting bodies in international finance, and will have far-reaching ramifications both for global capital operating inIndia, and the ability of Indian firms to undertake exports of financial services.

The FATF has 40 recommendations as a complete set of counter measures against money laundering and another 9 special measures to counter terror financing.

For granting membership FATF considers several wider issues also such as whether the country can demonstrate that it has a solid framework of measures to prevent and combat corruption through respect for transparency, good governance principles, high ethical and professional requirements, and established a reasonably efficient court system to ensure that judicial decisions are properly enforced. These are important considerations because major weaknesses in these areas may impede effective implementation of the FATF recommendations.

Further amendments to PMLA are expected to bring it closer to FATF’s recommendations.India’s ant-money laundering efforts are aided by a special unit called Financial Intelligence Unit (FIU).

Financial Intelligence Unit (FIU)

Indiaalso established a Financial Intelligence Unit India(FIU-IND) which included a system of reporting suspicious financial transactions. It is also responsible for coordinating and strengthening efforts of national and international intelligence and enforcement agencies in pursuing the global efforts against money laundering and related crimes. It report directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

It is not a regulatory authority. Its prime responsibility is to gather and share financial intelligence in close cooperation with the regulatory authorities including Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA).

FIU-IND processes and analyses financial information received by it and disseminates actionable intelligence in appropriate cases to relevant enforcement agencies.

Besides FATF, India is also a member of the Asia/Pacific Group on money laundering set up in 1997, the Egmont Group of FIUs which was set up in 1995, and the Eurasian group on combating money laundering.

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