The long road to FATF compliance
There is quite anticipation about the impending publication of India’s Mutual Evaluation Report (MER) by the Financial Action Task Force (FATF). It has been a long journey for India—from being accorded observer status in FATF in 2006 to becoming a full-fledged member in 2010, and now being placed in the ‘regular follow-up’ category by the global money laundering (ML) and terrorist financing watchdog. This is a distinction, as a Press Information Bureau note points out, shared by only four other G-20 countries.
The FATF, established in 1989, is a 40-member body that sets the global standards for national authorities in the fight against illicit funds generated through drug trafficking, illegal arms trade, cyber fraud, and other serious crimes. To this end, the FATF has put in place 40 recommendations covering all aspects of money laundering—from the legal system to measures expected of financial institutions to institutional measures expected of a country and steps for ensuring international cooperation—an acknowledgement of the global reach of terrorism. In addition, FATF has also issued nine recommendations that cover topics such as the need for ratification of United Nations instruments, criminalising the financing of terrorism and money laundering, freezing such assets, wire transfers, and cash couriers. In response, more than 200 countries and jurisdictions have implemented national laws as part of a coordinated global action to prevent crime, corruption, and terrorism financing.
Mutual evaluations are an analysis of a country’s preparedness to implement effective measures to combat money laundering, terrorist financing, and proliferation financing (which refers to the act of financing, in whole or in part in any manner, nuclear, chemical, or biological weapons in contravention of national and international laws). Mutual evaluations have essentially two main components: effectiveness of the laws and technical compliance. A FATF team makes an on-site visit to ascertain if the measures put in place are working effectively; in effect, it is an evaluation of a country’s seriousness in fighting the scourge of money laundering. The Prevention of Money Laundering Act (PMLA), which came into force in 2005 and was later amended in 2009, was a direct consequence of India’s commitment to the FATF recommendations. The Unlawful Activities (Prevention) Act 1967 was also amended in 2004 and again in 2008 to criminalise terrorist financing and to bring it in line with the UN Convention for the Suppression of the Financing of Terrorism.
The first Mutual Evaluation of India was conducted in 2010. The evaluation acknowledged that the anti-money laundering (AML)/counter-terrorism financing (CFT) regime in India, though young, revealed India’s serious commitment to combating terrorism in all its forms. However, the Mutual Evaluation believed that India still had some work to be done and recommended addressing the technical shortcomings.
FATF acknowledged the progress made and subsequently, in 2010, admitted India as the 34th Country Member of FATF. At the June 2013 plenary meeting, the FATF decided that India had reached a satisfactory level of compliance with all of the core and key recommendations. The latest FATF plenary held in Singapore in June 2024 placed India in the ‘regular follow-up’ category, a distinction as mentioned earlier shared by only four other G20 countries.
The FATF has expressed concern about FATF standards not being adhered to by virtual assets and virtual asset providers; though this was a general observation made, it has relevance also for India. Twenty-eight virtual digital asset platforms have since registered with the Financial Intelligence Unit, India, the nodal agency dealing with all information relating to suspect financial transactions. This has been termed the Travel Rule and is aimed at mandating financial institutions and crypto firms involved in virtual asset transfers to ensure compliance with FATF guidelines.
Given security concerns, it is essential that India puts in place a robust anti-money laundering regime. The best way to counter terrorist activities is to dry up the funding; adhering to the FATF recommendations will ensure this. But it is also essential that agencies empowered in this regard, namely the Enforcement Directorate, exercise due diligence and act only where there is incontrovertible proof—as the FATF has also pointed out, improvements are needed to strengthen the supervision and implementation of preventive measures. Further, it has been observed that India needs to address delays relating to concluding money laundering prosecutions. Having said that, India does have a lot to cheer about—its performance on the FATF Mutual Evaluation holds significant advantages for the country’s growing economy, as it demonstrates the overall stability and integrity of the financial system. Good ratings will lead to better access to global financial markets and institutions and increase investor confidence. It will also help in the global expansion of the Unified Payments Interface, India’s fast payment system.
(The writer is chairman (retired), Central Board of Indirect Taxes & Customs)