ACFCS Regional Report India: Country pulls back on AML to bolster sagging economy on cusp of FATF visit

By Brian Monroe
bmonroe@acfcs.org
February 5, 2020

India’s fight against financial crime has seen some successes in recent years along with bold moves by the government to better identify massive cash hoards held within its borders and nearby environs – funds that could be the result of criminal acts, corruption, money laundering and tax evasion.

But a push in recent years to strengthen laws tied to anti-money laundering (AML) and tax evasion are now potentially viewed as a hindrance to growth, with some finance ministers actively looking to weaken related regulations, making compliance and tax infractions that were criminal violations muted into only fineable failings.

That retrenchment, and India’s historical track record for not being able to tackle enough large scale financial crime cases – including high-profile frauds, such as the Punjab and PMC Bank cases and money laundering investigations rocking the region – is something that will likely be highlighted as a concern when a global AML watchdog comes calling later this year.

The Paris-based Financial Action Task Force (FATF), the international standard-setter of AML requirements, will be visiting India in April, according to media reports, to get an update on issues addressed since the last visit, with a formal review scheduled for the first quarter of 2021.

Part of the pullback on AML compliance countermeasures has to do with a general economic slump that has hit the Indian economy hard. Three years ago, India was enjoying economic growth of about 9%. Now the rate of expansion has slumped to just half that, according to media reports.

The country’s gross domestic product grew by just 4.5% in the July to September quarter, the lowest level since early 2013. GDP growth was at 7% in the same period last year, and 5% in the previous quarter.

Economic growth has now fallen for six consecutive quarters, a slide that can be partially attributed to the recent weakness of India’s factories.

The GDP figure is the “weakest recorded under Prime Minister Narendra Modi, who first swept to power five years ago promising to take India’s economy to new heights and create millions of jobs every year,” according to media reports.

India, however, can’t let its focus on financial crime waver, even in the face of a foundering economy.

As economy contracts, so does bite of counter-crime laws

Arguably, the illicit funds flowing through those trade-based money laundering (TBML) networks are propping up trade, keeping banks more liquid and helping the economy not to slide even further.

That could be why some powerful Indian politicians want to weaken laws tied to stopping money laundering and tax evasion.

In an effort to “catapult” the country to an economy of $5 trillion, the Government of India, under the guidance of Finance Minister Nirmala Sitharaman, will be decriminalizing some acts such as money laundering and income tax acts, according to media reports. This will be a part of the Budget 2020.

The Indian Government is planning to decriminalize the Income Tax Act and the Prevention of Money Laundering Act (PMLA) in order to boost confidence in business.

She also stated that these steps are being taken to turn India into a $5 trillion economy. She explained that decriminalizing corporate laws, settling tax disputes and rapid privatization of state-run firms are the steps to reach this goal.

 “I have gone through this (Companies Act) with a comb,” FM Sitharaman said. “We are working to decriminalize companies and ensure that no other Acts including Income Tax Act and PMLA, have such provisions.” 

There will be amendments made to about 46 penal provisions for removing criminality or reducing punishments only to a fine. 

‘Concern’ about AML enforcement, investigations

It’s unfortunate India in some ways is going backwards in its fight against financial crime as its deficiencies and vulnerabilities have been widely noted by multiple international reviewers.

India is categorized as a major money laundering, drug transit and precursor chemical country by the 2019 U.S. International Narcotics Control Strategy Report (INCSR).

The report notes that while India has made a host of improvements to its AML requirements, including know-your-customer provisions, criminalizing money laundering and sharing information with foreign partners, including the U.S., the country it is still lax when it comes to a system for identifying and forfeiting ill-gotten assets – a critical weapon that can both deprive organized criminal groups of funds and physical goods and boost the funding for investigators.

The Indian government continues to analyze the outcome of a 2016 demonetization initiative – where the country demonetized certain high-denomination banknotes to counter criminals and tax evaders – done in part as well to formalize and digitize India’s financial system, according to the money laundering portion of the INCSR.  

Despite the generally positive trend of bringing more money into the formal financial system – giving more opportunities for AML teams to review and create intelligence for law enforcement – India continues to “face vulnerabilities, including informal financial networks, commonly referred to as hawalas; complex onshore and offshore corporate structures; and enforcement capacity constraints.”

The Reserve Bank of India’s (RBI) August 2018 Annual Report reveals 99 percent of the high-denomination banknotes cancelled during the demonetization program were “deposited or exchanged for new currency, meaning the ‘black money’ that authorities expected to purge found its way back into the system.”

India has ‘taken steps’ on fincrime but ‘deficiencies remain’

Analysts suggested that while demonetization met the objective of “bringing transactions into the formal economy, the objective of identifying tax evaders and criminals attempting to exchange excessive high-denomination currency was less successful,” according to the INCSR.

On the compliance and oversight ends of the compliance equation, India has “taken steps to implement an effective AML regime, but deficiencies remain,” noted the report.  

Observers and law enforcement professionals “express concern about implementation and enforcement of current laws, especially regarding criminal prosecutions,” the report noted. “Authorities believe India has insufficient investigators to analyze the enormous amount of potential money laundering data identified during demonetization.”

The U.S. believes India needs to quickly and completely bolster several gaping holes in the country’s fincrime defenses and “address noted shortcomings in the criminalization of money laundering and in its domestic framework for confiscation and provisional measures.”

The government should ensure all relevant non-bank financial operations subject to AML rules comply with the regulations through stronger exams, overall oversight and more and stronger penalties for scofflaws.

Additionally, India should extend its suspicious transaction report safe harbor provisions to cover all employees, helping them to be a more willing ally to AML compliance officers.  Lastly, India should make better use of “data and analytics to detect trade anomalies, possibly indicating customs fraud, TBML, and counter-valuation in informal financial networks.”

Building better AML capacity through U.S. regulator partnerships

On the positive side, the country is trying to build better AML capacity through stronger partnerships with U.S. regulators.

Internationally, during 2018, the U.S. Federal Reserve Bank (FRB) conducted training and provided technical assistance to banking supervisors on AML topics during four seminars: one in Sao Paulo, Brazil; one in Cairo, Egypt; one in Washington, D.C.; and one in Abuja, Nigeria.

India was one of the countries participating in these FRB initiatives along with officials from Armenia, Brazil, Cote d’Ivoire, Egypt, Ghana, Hong Kong, Kenya, Korea, Lebanon, Lesotho, Liechtenstein, Mexico, Mongolia, Nigeria, Pakistan, Singapore, Sri Lanka, Sudan, Uganda, and Zimbabwe.

As well, Indian financial watchdogs attended the 2018 AML School offered by the U.S. Treasury’s Office of the Comptroller of the Currency (OCC), the regulator of the country’s largest and most complex banks, along with foreign supervisors from Afghanistan, Aruba, Canada, Eastern Caribbean, Hong Kong, Israel, Latvia, Malaysia, Netherlands, Philippines, South Africa, and South Korea.

A ‘giant leap’ in fincrime effectiveness?

As well, regulatory and investigative agencies in India do have some momentum to report to international watchdogs and allies.

New Delhi has a host of measures to list before FATF evaluators as “giant leaps” in the fight against financial crimes. These include:

  • The Fugitive Economic Offenders Act, 2018.
  • More aggressive seizure of properties and assets, a key concern by the U.S.
  • The rise in registration of financial crime cases.
  • A Hawala crackdown.
  • A push for more extraditions in high-profile cases.

Even so, the bottom line and likely overarching frustration for those grading India’s performance in fighting financial crime will be the “performance of the agencies in getting convictions of the accused,” according to one news story.

“Convictions and, in particular, convictions for large, complex international cases is a “grey area where not much success has been achieved in a decade,” according to the report.