India has consistently shown its commitment to combating financial crimes, specifically money laundering and terrorist financing, by aligning itself with the standards set by the Financial Action Task Force (FATF). As the world’s fifth-largest economy, India’s financial and economic growth brings with it a growing complexity in financial systems. Consequently, addressing illicit financial activities becomes crucial not only for India but for the stability of the global economy.
India’s journey toward improving its Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) frameworks is evident in its comprehensive approach towards FATF recommendations and compliance with international standards. Its focus is to not only prevent such illicit activities but also ensure strict penalties and sanctions for offenders.
This blog examines the various measures India has implemented to combat money laundering and terrorism financing, providing an in-depth look at the regulatory framework, challenges, and progress the country has made in the global fight against financial crime.
India’s Measures To Combat Money Laundering and Terrorist Financing
Introduction to India’s AML/CTF Framework
India, as one of the world’s largest economies, faces unique challenges when it comes to preventing financial crimes like money laundering and terrorist financing. With its rapid economic growth, complex financial structures, and large informal economy, ensuring financial stability has become a priority. To address these concerns, India has adopted measures aligned with global standards, particularly the recommendations of the Financial Action Task Force (FATF).
India’s commitment to strengthening its Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regime is evident in its ongoing efforts to implement FATF recommendations. The country’s recent mutual evaluation by FATF, the Asia/Pacific Group on Money Laundering (APG), and the Eurasian Group (EAG) confirmed that India is progressing in combating illicit financial activities.
India’s FATF Mutual Evaluation And Technical Compliance Ratings
India’s mutual evaluation in 2024 by the FATF sheds light on the country’s strengths and areas for improvement. The evaluation is divided into two key areas: Effectiveness and Technical Compliance, both of which offer insight into how well India is combating financial crime. As per the report, while India has demonstrated a strong understanding of risk and international cooperation, areas such as terrorist financing and money laundering investigations still need improvement.
In terms of Technical Compliance, India’s ratings also highlight progress:
Technical Compliance (Recommendations) | Rating |
R.1 – Risk-Based Approach | Largely Compliant (LC) |
R.2 – National Cooperation | Compliant (C) |
R.3 – Money Laundering Offence | Largely Compliant (LC) |
R.5 – Terrorist Financing Offence | Largely Compliant (LC) |
R.7 – Proliferation Sanctions | Largely Compliant (LC) |
R.8 – Non-Profit Organisations | Partially Compliant (PC) |
R.12 – Politically Exposed Persons | Partially Compliant (PC) |
R.15 – New Technologies | Largely Compliant (LC) |
R.24 – Transparency of Legal Persons | Largely Compliant (LC) |
R.28 – Supervision of DNFBPs | Partially Compliant (PC) |
These ratings indicate that while India is compliant or largely compliant with most of the FATF’s 40 recommendations, some areas, such as supervision of Designated Non-Financial Businesses and Professions (DNFBPs) and the regulation of politically exposed persons (PEPs), require further improvement.
Challenges In Combating Money Laundering And Financial Crime
India’s diverse economic landscape means that the country faces complex risks associated with money laundering. The primary sources of illegal funds include activities like fraud, corruption, and drug trafficking. The FATF assessment acknowledges India’s focus on dealing with money laundering related to fraud but points out that crimes like drug trafficking and human trafficking have received less attention in terms of prosecution and prevention efforts.
Additionally, the backlog of pending money laundering cases in Indian courts is a significant hurdle. Delayed prosecutions not only weaken enforcement but also diminish the deterrent effect of AML laws. There is a need for more expedited court processes and stringent sanctions to send a clear message to offenders.
Digital payments and financial technologies also present both opportunities and challenges. As India moves towards a more digitised economy, it must ensure that financial institutions and fintech companies comply with FATF recommendations. The FATF’s guidance on virtual asset service providers (VASPs) must be effectively integrated into the Indian regulatory landscape.
Addressing Terrorist Financing And Proliferation Financing
India faces severe threats from terrorist financing, particularly linked to groups such as Al Qaeda and ISIL. The FATF has noted India’s focus on disruption and prevention. While these efforts have been commendable, the country must improve in concluding prosecutions and ensuring convictions for those financing terrorism.
Non-profit organisations (NPOs) pose a unique challenge, as they can be misused for funnelling terrorist funds. While India has implemented some safeguards, the FATF’s assessment indicates that the non-profit sector is still vulnerable, and further outreach is needed to mitigate these risks.
In terms of proliferation financing, India has shown success in applying targeted financial sanctions, but further steps are required to fully implement these measures across the economy. The focus should be on increasing compliance among smaller financial institutions and the non-financial sector, particularly in high-risk areas like precious metals and stones.
AML/CTF Compliance In India’s Financial Sector
India’s financial sector, particularly commercial banks, has made strides in implementing AML/CTF measures, especially in applying enhanced due diligence to politically exposed persons (PEPs). However, domestic PEPs remain under-monitored from a compliance perspective. The FATF has recommended that India enhance its measures to ensure full coverage of domestic PEPs, which would close a crucial gap in its compliance framework.
Smaller financial institutions and virtual asset service providers (VASPs) are still in the early stages of compliance. As these sectors grow, regulators must enforce stricter supervision and ensure that they comply with AML/CTF regulations.
India’s Financial Inclusion And Its Impact on AML/CTF
A remarkable development in India’s financial landscape is the rise in financial inclusion, with more than half the population now holding bank accounts, facilitated by government initiatives like Jan Dhan Yojana. Greater financial inclusion not only promotes economic growth but also enhances financial transparency, which plays a key role in AML/CTF efforts.
India’s move towards digital payments has also supported transparency. Initiatives like the Unified Payments Interface (UPI) have made financial transactions easier to track, thereby reducing the potential for illicit activities to go unnoticed. The simplified due diligence processes for small accounts have been beneficial for promoting inclusion without compromising financial security.
International Cooperation And Asset Recovery
India’s size and complexity mean that its agencies must coordinate effectively to prevent financial crime. Indian authorities have demonstrated good levels of cooperation, both domestically and internationally. The FATF assessment highlights India’s success in international cooperation initiatives, particularly in asset recovery and targeted sanctions.
India’s willingness to engage with global partners in the fight against money laundering and terrorism financing positions it as an essential player in the international community’s efforts to address financial crime.
AuthBridge’s AML Solution
AuthBridge’s Anti-Money Laundering (AML) solution is designed to help businesses meet compliance requirements by enabling comprehensive risk assessment and fraud detection. Key features include customer due diligence, sanctions screening, transaction monitoring, and risk-based reporting. The solution integrates global data sources and uses AI, machine learning, and biometrics to detect suspicious activities, reducing false positives and improving efficiency. It allows for real-time alerts and customisable workflows, making it highly adaptable for businesses across sectors to ensure regulatory adherence.
Conclusion
India has made substantial progress in strengthening its AML/CTF framework and addressing the risks posed by financial crime. The FATF mutual evaluation shows that while India has made commendable strides, there are still areas needing attention, particularly in the supervision of DNFBPs and ensuring more timely prosecution of financial criminals.
India’s ability to adapt to the evolving challenges posed by digital payments, virtual assets, and global terrorist threats will determine the long-term effectiveness of its AML/CTF framework. With continuous efforts and the right strategic focus, India can further strengthen its position in combating financial crime at both the national and global levels.
FAQs
In India, Counter-Terrorism Financing (CTF) refers to efforts aimed at preventing the flow of funds to terrorist activities. It works alongside Anti-Money Laundering (AML) regulations under the Prevention of Money Laundering Act (PMLA). Key laws like the Unlawful Activities (Prevention) Act (UAPA) and the Financial Intelligence Unit-India (FIU-IND) enforce CTF measures, ensuring compliance with international standards such as the Financial Action Task Force (FATF) recommendations.
AML (Anti-Money Laundering) sanctions in India are legal actions aimed at preventing money laundering and terrorist financing. Under the Prevention of Money Laundering Act (PMLA), financial institutions must report suspicious transactions to the Financial Intelligence Unit (FIU-IND). Violations can lead to penalties, asset freezes, and prosecution. India’s AML framework follows global FATF standards to ensure compliance and protect the financial system.
AML in India is controlled by the Financial Intelligence Unit-India (FIU-IND), with oversight from the Ministry of Finance. Key regulators like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority (IRDAI) enforce AML guidelines within their sectors, under the Prevention of Money Laundering Act (PMLA).
A red flag in AML refers to suspicious activities or transactions that may indicate money laundering. Examples include large cash transactions, multiple small deposits (structuring), transactions with high-risk countries, or unexplained wealth. These trigger further investigation by financial institutions to ensure compliance with AML regulations.
The three stages of AML (Anti-Money Laundering) are:
Placement: Illicit funds are introduced into the financial system, often through cash deposits, purchases, or transfers.
Layering: Funds are moved through complex transactions, making tracing difficult. This may include multiple transfers or conversions across accounts.
Integration: The “cleaned” money is reintroduced into the legitimate economy, appearing as legal income through investments, purchases, or business operations.
