Enhancing India’s Court Capacity to Tackle Money Laundering and Terror Financing: FATF Recommendations
- September 20, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Enhancing India’s Court Capacity to Tackle Money Laundering and Terror Financing: FATF Recommendations
Sub: IR
Sec: Int org
Why in News
The Financial Action Task Force (FATF) has released its mutual assessment report on India, highlighting the need for significant reforms to reduce the backlog of pending money laundering and terror financing cases. The report emphasizes the urgency to enhance the capacity of the Indian court system and strengthen the Enforcement Directorate (ED) to address delays in prosecutions.
Key Recommendations from the FATF Report
Increasing Court Capacity for Money Laundering Cases: The FATF report urges India to expand the capacity of its court system to deal with a large number of pending money laundering (ML) trials. Suggestions include increasing the number of specialized prosecutors and judges in the Enforcement Directorate (ED) to speed up prosecutions.
Addressing Delays in Terror Financing (TF) Prosecutions: Along with money laundering, the FATF stresses the need for swift action to reduce delays in terror financing cases. Specific proposals include making systemic changes to improve prosecution efficiency and expedite court trials.
Challenges Due to Constitutional Petitions: Between 2018 and 2022, trials under the Prevention of Money Laundering Act (PMLA) were stalled due to 121 constitutional petitions challenging various provisions of the law. The Supreme Court ruling in July 2022 (Vijay Madanlal Chowdhary vs. Union of India) upheld the provisions of the PMLA, allowing prosecutions to resume.
Recommendations for Enhancing Financial Investigation and Anti-terror financing Capabilities
Financial Network Analysis: particularly concerning money laundering linked to human trafficking and migrant smuggling.
Targeted Financial Sanctions: to ensure that all relevant entities receive real-time updates on suspicious transactions.
Non-Profit Organization (NPO) Sector: The FATF recommends that India adopt a risk-based approach to prevent the misuse of the non-profit organization (NPO) sector for terror financing (TF).
Politically Exposed Persons (PEPs): The report identifies a technical gap, noting that the definition of Politically Exposed Persons (PEPs) is absent in PMLA rules.
About Politically Exposed Persons (PEPs): A Politically Exposed Person (PEP) is an individual entrusted with a prominent public function, making them vulnerable to risks like money laundering, corruption, or bribery. Due to these risks, FATF Recommendations require additional Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) measures for business relationships with PEPs, their family members, and close associates.
These measures are preventive and do not imply that all PEPs engage in criminal activities. Effective customer due diligence, including identifying PEPs through external sources like databases, is essential for compliance, though the use of such databases is not mandatory.
Enhancing DNFBP Supervision: The FATF calls for an increase in supervisory capacity for newly established Designated Non-Financial Businesses and Professions (DNFBPs).
About Designated Non-Financial Businesses and Professions (DNFBPs):
DNFBP refer to businesses and professionals that are vulnerable to money laundering (ML) and terrorist financing (TF) risks, but fall outside the traditional financial sector.
According to FATF, DNFBPs include real estate agents, dealers in precious metals and stones, lawyers, accountants, notaries, and trust and company service providers.
These entities, acting as gatekeepers, are exposed to high-risk transactions, such as large cash payments or complex financial arrangements, making them crucial in anti-money laundering (AML) and counter-terrorist financing (CFT) efforts. FATF Recommendations require DNFBPs to implement customer due diligence and report suspicious activities to prevent misuse of their services.
About Financial Action Task Force (FATF): It is an inter-governmental body responsible for setting standards and policies to combat money laundering and terrorist financing globally.
Objective: Establish global standards and promote policies to prevent money laundering and terrorism financing, at both national and international levels.
Origins and Mandate
Established: 1989 at the G7 Summit in Paris to address money laundering.
Mandate Expansion: In 2001, FATF’s scope expanded to include combating terrorism financing.
Headquarters: Paris, France.
Membership
FATF consists of 40 members, including major countries like the United States, India, China, Saudi Arabia, Britain, Germany, France, and the European Union.
India’s Membership: India joined FATF in 2010.
FATF Grey List and Blacklist
Black List: Countries involved in terror financing and money laundering, categorized as Non-Cooperative Countries or Territories (NCCTs), are placed on this list. The list is updated regularly.
Currently, North Korea, Iran, and Myanmar are on the blacklist.
Grey List: Countries with shortcomings in countering terror financing and money laundering are placed on the grey list as a warning of potential blacklisting.
Consequences of Being on the Blacklist
Countries on the blacklist are denied financial aid from global institutions like the IMF, World Bank, ADB, and EU. They face international financial sanctions and economic restrictions.
India’s Performance in FATF Evaluation
Out of 40 parameters examined by FATF, India received the highest rating in 37.
FATF Plenary Report: The plenary held in Singapore between June 26-28, 2024, recognized India’s “high level of technical compliance” with FATF standards.
“Regular Follow-Up” Category: India was placed in the “regular follow-up” category, a distinction shared with only four other G20 countries, including the UK, France, and Italy. Countries in this category are required to submit a follow-up report to FATF once every three years.
About Prevention of Money Laundering Act, 2002 (PMLA): It was enacted to fight against the criminal offense of legalizing the income/profits from an illegal source. The Prevention of Money Laundering Act, 2002 enables the Government or the public authority to confiscate the property earned from the illegally gained proceeds.
Imprisonment: The offender can face imprisonment for not less than three years, extending up to seven years. In some instances where the crime involves specified offenses, imprisonment can extend up to 10 years.
Monetary Penalty: In addition to imprisonment, a penalty of Rs. 5 lakhs can be imposed on the offender.
Enforcement Directorate (ED): The Directorate of Enforcement is a multi-disciplinary organization mandated with investigation of offenses of money laundering and violations of foreign exchange laws. The statutory functions of the Directorate include enforcement of following Acts:
The Prevention of Money Laundering Act, 2002 (PMLA): It is a criminal law enacted to prevent money laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.
The Foreign Exchange Management Act, 1999 (FEMA): It is a civil law enacted to consolidate and amend the laws relating to facilitate external trade and payments and to promote the orderly development and maintenance of foreign exchange market in India.
The Fugitive Economic Offenders Act, 2018 (FEOA): This law was enacted to deter economic offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts.