Preventive Legislations ML/FT- Major Countries/Regions : India
Banks in India are regulated mainly by the Banking Regulation Act (BR Act ) of 1949, which provides a framework for the supervision and regulation of all banks in India. Additionally, it gives the country’s central bank, the Reserve Bank of India (RBI), the power to grant licenses to banks and regulate their business operations.
Established on April 1, 1935, the RBI issues various guidelines,
notifications and policies to regulate the banking sector. It has a broad range
of responsibility as a primary regulator of the financial sector that includes
directions on Know Your Customer (KYC) norms and developing and implementing
AML/CFT regulations based on Financial Action Task Force (FATF) standards.
Detailed guidelines contain recommendations on customer due diligence (CDD) for
banks by the Basel Committee on Banking Supervision (BCBS), which helps banks
and other financial institutions know and understand their customers and
financial dealings and thus mitigate risks wisely.
India: Prevention of money laundering before PMLA 2002
Before
the enactment of the Prevention of Money-Laundering Act, 2002, the following
statutes addressed inadequately the issue of money laundering—
The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974
The Income Tax Act, 1961
The Benami Transactions (Prohibition) Act, 1988
The Indian Penal Code and Code of Criminal Procedure, 1973
The Narcotic Drugs and Psychotropic Substances Act, 1985
The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988
Banks in India were not willing to do away with their strict
bank secrecy policies, which allowed individuals to launder money easily. The
issue of money laundering took a massive turn with hawala’s ancient underground
banking system. This further degraded the situation.
Agreements were also made with countries to help each other in
the investigation of the cases related to money laundering. India made
bilateral agreements with an objective to tackle drug trafficking and money
laundering to achieve the goals of the Vienna Convention and FATF
recommendations. India had signed an agreement with Egypt in 1995 to tackle
drug related money laundering in both India and Egypt. As per the agreement
between the two, it involves exchange of operational intelligence and
identification, freezing and confiscation of property in relation to money laundering.
The government of India also made a comprehensive agreement in
1997 with Pakistan. The countries agreed to institute various co-operative
measures to control drug trafficking and money laundering. The governments of
both nations also decided to lay down mechanism to conduct joint financial
investigations and information exchanges.
The United nations convention against Illicit Traffic in
Narcotic Drugs and Psychotrophic Substances to which India is a party calls for
prevention of laundering of proceeds of drug crimes and other connected
activities and confiscation of proceeds derived from such offense. The Basle
Statement of Principle, enunciated in 1989 outlined basic policies and
procedures that banks should follow in order to assist the law enforcement
agencies in tackling the problem of money laundering. The Financial Action Task
Force established at the summit of seven major industrial nations held in Paris
, from 14th to 16th July 1989 to examine the problem of
money laundering has made 40 recommendations which provide the foundation
material for comprehensive legislation to combat the problem of
money-laundering. The major recommendations are classified under the following five heads
i.
Declaration of
money-laundering of monies carried through
serious crime a criminal offence
ii.
To work out modalities
of disclosure by financial institutions regarding reportable transactions
iii.
Confiscation of
proceeds of crime
iv.
Declaring
money-laundering to be an extraditable offence
v.
Promoting
international cooperation in investigation of money-laundering
Political Declaration and global Program of Action adopted by
United Nations General Assembly by its resolution No: S/17/2 of 23rd
Feb 1990, inter alia calls upon the member states to develop mechanism to
prevent financial institutions from being used for laundering of drug related
money and enactment of legislation to prevent such laundering
The United Nations Special Session on countering world DrugProblem Together concluded on the 8th to 10th June, 1998
has made another declaration regarding the need
to combat money laundering . India is a signatory to this declaration.
In
India money laundering is popularly known as Hawala transactions. It gained
popularity during early 90’s when many of the politicians were caught in its
net. Hawala is an alternative or parallel remittance system. The Hawala
Mechanism facilitated the conversion of money from black into white.
"Hawala" is an Arabic word meaning the transfer of money or
information between two persons using a third person. The system dates to the
Arabic traders as a means of avoiding robbery. It predates western banking by
several centuries
The
Government of India is committed to tackle the menace of Money Laundering and
has always been part of the global efforts in this direction. India is
signatory to the following UN Conventions, which deal with Anti Money
Laundering / Countering the Financing of Terrorism :
1. United Nations convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) (Vienna Convention)
2. UN Convention against Transnational Organized Crime (2000)[Palermo Convention]; and
3. UN Convention against Corruption (2003)
In
pursuance to the political Declaration adopted by the special session of the
United Nations General Assembly (UNGASS) held on 8th to 10th June 1998 (of
which India is one of the signatories) calling upon member States to adopt Anti
Money Laundering Legislation & Programme, the Parliament enacted a special
law called the ‘Prevention of Money Laundering Act, 2002’ (PMLA 2002).
Before
the enactment of the Prevention of Money-Laundering Act, 2002, the following
statutes addressed inadequately the issue of money laundering— The Conservation
of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 The Income
Tax Act, 1961 The Benami Transactions (Prohibition) Act, 1988 The Indian Penal
Code and Code of Criminal Procedure, 1973 The Narcotic Drugs and Psychotropic
Substances Act, 1985
The
Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances
Act, 1988 This was not sufficient to tackle the growing menace of money
laundering in India. In view of the urgent need for the enactment of a
comprehensive legislation inter alia for preventing money laundering and
connected activities, confiscation of proceeds of crime, setting up of agencies
and mechanisms for coordinating measures for combating money-laundering etc.,
India
has realized that the threat of money laundering and consequent terrorist
financing has strong and surreptitious ties to foreign lands and that with the
advancement of technology and development of newer methods of laundering money
it is imperative for the government to frame laws and regulatory mechanisms
which shall not only check the menace at the domestic level but shall also
forge strong ties with foreign countries and organizations.
The
Prevention of Money Laundering Bill 1998 was introduced in the Parliament on
4th August, 1998. The Bill was referred to the Standing Committee on Finance,
which presented its report on the 4th of March, 1999 to Lok Sabha. After
incorporating the recommendations of the Standing Committee, the Government
introduced the Bill in October 1999. It received the assent of the President
and became Prevention of Money Laundering Act, 2002 (PMLA) on 17th January
2003. It came into force with effect from July 1, 2005. The Preamble states the
Object of the Act as, “An Act 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.”
Although a member of the Asia Pacific Group on Money Laundering and of the Egmont Group, India was still not a member of the Financial Action Task Force. It worked towards the membership of the FATF and became an FATF Observer in February 2007.
In a major boost to measures being taken by India against money laundering and terror financing activities, the Financial Action Task Force (FATF) on Wednesday [June 28, 2013]said the country has substantially addressed the deficiencies in its regulatory framework and has become largely compliant with global standards in this regard. In its latest report on India, FATF said it has “recognised that India had made significant progress in addressing deficiencies identified in its mutual evaluation report (of June 2010) and decided that the country should be removed from the regular follow-up process. FATF said all the financial sector regulators in the country have amended their inspection procedures to give much greater emphasis to AML/CFT in the routine examination programme.
India became Observer at FATF in the
year 2006. Since then, India has been working towards full-fledged Membership
of FATF.
As a part of its Membership, a joint FATF / Asia Pacific Group Mutual Evaluation Team visited India in November-December, 2009 for on-site assessment of Indias compliance with the 40+9 Recommendations of FATF.
Mutual Evaluation Report on India and the India's Membership issues were discussed in the third meeting of FATF Plenary-XXI held in Amsterdam, the Netherlands from 23rd to 25th June, 2010. FATF Plenary adopted the Mutual Evaluation Report on India on 24th June 2010 and on 25th June 2010 admitted India as 34th Country Member of FATF.
India became a member of FATF in 2010, the same year when it was placed under the regular follow-up process for its compliance to various global standards.
FATF membership is very important for India in its quest to become a major player in the International finance. It will help India to build the capacity to fight terrorism and trace terrorist money and to successfully investigate and prosecute money laundering and terrorist financing offences. India will benefit in securing a more transparent and stable financial system by ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups. The FATF process will also help us in co-ordination of AML/CFT efforts at the international level.
Besides, AML/CFT compliance monitoring has been introduced for the first time for India Post’s financial services business and the inspection programme commenced in April 2011. With respect to the suspicious transactions reporting regime, the Financial Intelligence Unit (FIU) has further enhanced its outreach programme to provide guidance to the financial sector on their reporting obligations, and has engaged in extensive compliance monitoring. The result has been a significant increase in the number of STRs filed both with respect to money laundering and terror financing, without any evidence that this constitutes defensive reporting. Approximately two-thirds of the STRs received. Besides, various designated non-financial businesses and professions (DNFBPs) have been brought within the scope of Prevention of Money Laundering Act (PMLA), such as casinos; real estate agents, sub-registrars in charge of registering property; dealers in precious metals/stones; dealers in high-value goods; and safe deposit keepers.
India: Prevention of money laundering after PMLA 2002
In the book 'Corruption
in India: The DNA and RNA' authored by Professors Bibek Debroy and Laveesh
Bhandari say that the public officials in India may be cornering as much as
Rs.92,122 crore ($18.42 billion), or 1.26 per cent of the GDP, through
corruption. The books estimates that corruption has virtually enveloped India
growing annually by over 100 percent (Source : Economic Times Dated December
11, 2011)
The Government has a well established
strategy and institutional mechanism to effectively deal with terrorist
financing and money laundering problem. The Unlawful Activities (Prevention)
Act, 1967(UAPA) and the Prevention of Money laundering Act, 2002 (PMLA) are
effective instrumentalities to combat offences relating to Terrorist Financing
and Money laundering. A special Combating Financing of Terrorism (CFT) Cell has
been created in the Ministry of Home Affairs in 2011, to coordinate with the
Central Intelligence/Enforcement Agencies and the State Law Enforcement
Agencies for an integrated approach to tackle the problem of terror funding.
Also a Terror Funding and Fake Currency Cell has been set up in the National
Investigation Agency to investigate Terror Funding cases.
The Unlawful Activities (Prevention) Act,
1967 has been strengthened by amendments in 2013 which inter-alia includes
enlarging the scope of proceeds of terrorism to include any property intended
to be used for terrorism, enlarging the scope of Section 17 relating to
punishment for raising funds for terrorist act by including within its scope,
raising of funds both from legitimate or illegitimate sources by a terrorist
organization, terrorist gang or by an individual terrorist, and includes within
its scope offences by companies, societies or trusts.
The PMLA has also been strengthened in 2013 by incorporating the provisions
relating to removing the monetary threshold for schedule offences,
strengthening confiscation and provisional attachment powers with regard to
money laundering investigation, covering new financial institutions and
designated non-financial business and professions within the scope of PMLA,
enhancing the powers of Financial Intelligence Unit (FIU) to access information
from banks and financial institutions and introduction of broad range of
sanctions under PMLA including sanctions against designated Directors and
employees of reporting entities. Thus, both PMLA and UAPA have sufficiently
stringent provisions to combat money laundering and terrorist financing.
The Central and State Law Enforcement Agencies have registered a total of 217
FIRs and 132 charge sheets have been filed in various Courts in terror
financing cases since 2006 till date. These also include 11 cases investigated
by the National Investigation Agency (NIA)[09 Dec 2015].
The Financial Acton Task Force (FATF) team
from Paris, France had visited India in 2011 to monitor compliance of India’s
Action Plan with FATF standards and since then India has complied with all FATF requirements and Action Plan items. It has been accepted and approved by the
FATF in its Plenary Meeting held in June, 2013.
The Act was amended from 1st February,
2013 to make it more effective in preventing unlawful activities and meet the
standards of the Financial Action Task Force. The salient features of the
amendment are listed below:
· Increase in the period of
declaration of an association as unlawful from two years to five years;
· Enlarging the ambit of 'terrorist
act' by incorporating production or smuggling or circulation of high quality
counterfeit Indian paper currency, coin or of any other material, and
criminalizing high quality counterfeiting;
· Raising funds for terrorist acts
now includes raising of funds, both from legitimate or illegitimate sources, by
a terrorist organization or by terrorist gang or by an individual terrorist;
· Offences by companies, societies
or trusts brought in the ambit of the Act and punishments prescribed;
·
The scope of proceeds of terrorism enlarged to include any property intended to
be used for terrorism; and
· Courts empowered for- i) attachment or forfeiture of property
equivalent to the counterfeit Indian currency involved in the offence; ii)
attachment or forfeiture of property equivalent to or the value of the proceeds
of terrorism involved inthe offence; and iii) Confiscation of movable or
immovable property on the basis of the material evidence where the trial cannot
be concluded.
The Act also gives effect to UNSCR 1267
and 1373, enabling freezing, seizing or attaching funds and other financial
assets held by designated individuals or entities. Offences under UAPA are
included as predicate offences under PMLA.
PMLA 2002
The
Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal
framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force
with effect from July 1, 2005
RBI Master Circular from time to time on Know Your Customer (KYC) norms / Anti-Money
Laundering (AML) standards/Combating Financing of Terrorism (CFT)/Obligation
of banks and financial institutions under PMLA, 2002 form the basis for Indian efforts
against ML/FT risks.
The norms for
monitoring AML/CFT risk following risk based approach of FATF for Indian banks
were developed by the Working Group constituted by Indian Bank’s Association.
Guidance note covered Customer/Product
risk classification and rating including differentiated CDD measures
which were implemented by RBI subsequently.
As the name suggests, The Prevention of
Money-Laundering Act (PMLA), 2002 is an Act 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 Prevention of Money Laundering Act was aimed to fight the
evil of money laundering in India with its main objective to:
- Prevent
and regulate money laundering;
- Confiscate
the property obtained from money laundering;
- Tackle
other issues and problems associated with money laundering in India.
The Reserve Bank, Securities Exchange Board of India and the
Insurance Regulatory and Development Authority, were brought under the ambit of
PML Act 2002. Thus financial institutions like banks, mutual funds, insurance
firms were made subject to the provisions of this Act as the money laundering
is a complex and manipulative subject.
The PMLA 2002 has been amended under the Finance Act 2019. One
of the changes made to the concept of PMLA’s proceeds of crime. It covers not
just assets derived or acquired from scheduled offences but also property
derived or obtained directly or indirectly due to any illegal activity related
to a scheduled offence.
If a person actively or indirectly intends to engage in or
intentionally participated in, knowingly is party to, or is found to be engaged
in the concealing, owning, obtaining or using the property related to proceeds
of crime, then such person has committed the offence of money laundering.
Penalties for
money laundering in India:
- Imprisonment (3 to 7 years,
extendable to 10 years).
- Fines ( unlimited ).
- Confiscation of proceeds.
- Attachment of properties.
- Forfeiture of assets.
- Enhanced penalties for repeat offenders.
At the apex level there is National Committee on ML
& FT Risk Management. RBI is the lead regulator for AML/CFT. Indian Banks
Association help in developing policies and procedures in the banking industry
that matches the required regulatory framework. Each sectoral regulators guides
and aids adequate supervision of AML/CFT best practices in their respective
fields.
The authorities to investigate and prosecute anti-money laundering offences in India
Powers of investigation and prosecution for offences under the Act have been conferred on the Director, Enforcement Directorate. The ED comes under the Department of Revenue within the Ministry of Finance. It has the authority to initiate proceedings for the seizure of property as well as proceedings in the designated Special Court for money laundering crimes. At the federal level, the Directorate of Enforcement (ED) is the principal legal entity in charge of looking into and prosecuting money laundering offences under the PMLA.
In addition, the Adjudicating Authority in terms of section 6 of the Act and the Appellate Tribunal under section 25 of the Act have also been constituted and have become functional.
The Financial Intelligence Unit – India (FIU-IND), which is a part of the Department of Revenue and Ministry of Finance, is the primary national body in charge of collecting, processing, assessing, and disseminating data about suspicious financial transactions to law enforcement authorities and foreign FIUs.
Apart from the ED and FIU, regulators like the Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), and Insurance Regulatory & Development Authority of India (IRDAI) are empowered to handle matters relating to money laundering activities and establish AML standards.
Primary regulatory bodies that oversee the Indian
financial sector and develop AML/CTF policies:
Financial Intelligence Unit- India (Flu-IND)
Established in 2004 as a central national
organisation charged with the responsibility of collecting, sorting, analysing,
and disseminating information about suspected financial activities to law
enforcement authorities and international financial intelligence units.
Ministry
of Finance
Responsible for India‘s fiscal
policies, including revenue and tax collection, budgeting and expenditure of
the Government.
The MOF consists of the Department
of Economic Affairs, the Department of Revenue, the Department of Expenditure,
the Department of Financial Services, and the Department of Disinvestments.
Department of Revenue is
responsible for exercising regulatory and supervisory control over the AML/CFT
strategies, and for inter-ministerial and inter-departmental co-ordination with
respect AML/CFT measures,
Directorate of Enforcement ensures
the implementation of AML measures in accordance with the Prevention of Money
Laundering Act.
Economic
Intelligence Council
Supreme coordinating authority in
matters regarding economic offences, strategies on intelligence sharing,
co-ordination, etc.
The implementation of decisions
taken by the EIC is monitored by the Working Group on Intelligence Apparatus,
set up for this purpose within the EIC.
It is chaired by the Minister for
Finance and comprises of the senior most functionaries of various Ministries
and intelligence agencies; and the Governor of the RBI and the Chairman of the
SEBI.
The
Inter-Ministerial Coordination Committee (IMCC)
The Inter-Ministerial Coordination
Committee (IMCC) on
anti-money laundering and combating of terrorist financing is tasked with
Development and implementing
policies on anti-money laundering or countering the financing of Terrorism,
Operational co-operation between
the Government, law enforcement agencies, the Financial Intelligence Unit-India
and the regulators or supervisors;
Policy co-operation and
co-ordination across all relevant or competent authorities.
The IMCC is headed by the Revenue
Secretary at the Ministry of Finance.
The
Directorate of Enforcement
Government body with field offices
spread across various of the country.
Mandate is to
Investigate offences of money
laundering under the provisions of Prevention of Money Laundering Act,
2002(PMLA)
Take actions of attachment and
confiscation of property if the same is determined to be proceeds of crime
derived from a Scheduled Offence under PMLA, and
Prosecute the persons involved in
the offence of money laundering.
Reserve Bank of India (RBI)
The central and primary financial regulator
responsible for issuing bank licences, developing and enforcing anti-money
laundering and counter-terrorist financing laws. RBI adheres to FATF's
anti-money laundering and counter-terrorist financing strategy. RBI is
responsible for holding the banks and financial institutions accountable for
compliance with applicable regulations
Securities and Exchange Board of India (SEBI)
SEBI was created on 12 April 1992 to safeguard the
interests of securities investors and to facilitate and regulate the securities
market. Additionally, it provides anti-money laundering and counter-terrorist
financing rules for the financial markets.
Insurance Regulatory Development Authority (IRDA)
This authority is responsible for regulating,
promoting, and ensuring the insurance and reinsurance industries' orderly
growth. IRDAI is in active coordination with various
agencies/departments in ensuring effective implementation of AML/CFT regime in
India and is part of the Working Group for National Risk Assessment (NRA) on
AML/CFT constituted by the Department of Revenue. IRDAI is also part of the
Core Working Group (CWG) constituted by the Department of Economic Affairs
(FATF Cell) for implementation of revised recommendations of FATF.
In addition, IRDAI is also actively
associated with the Eurasian Group on Combating Money Laundering and Financing
of Terrorism (EAG), a FATF style regional body.
Department of Revenue formed an
Inter-Ministerial Co-ordination Committee (IMCC) and subsequently Joint Working
Group (JWG) of which IRDAI is a member. The main aim of aforementioned
Committees/group is to co-operate/ consult/ develop/ implement matters related
to anti-money laundering or countering the financing of terrorism laws,
regulations and guidelines among the Government, law enforcement agencies,
FIU-IND and the regulators. IRDAI is reporting the concerned Ministry the
preparedness of the insurance sector against the applicable FATF
recommendations.
Economic Offences Wing, Central Bureau of Investigation (CBI):
The CBI is a specialized police
organization that’s been established to investigate certain kinds of crimes,
such as crimes involving public officials who have engaged in corruption,
significant economic offences, fraud, and crimes that have implications for the
country or multiple states.
The
Central Board of Direct Taxes (CBDT)
CBDT, the Central
body responsible for implementation of Direct taxes, is responsible for
monitoring PEPs, very High Net-Worth Individuals (VHNIs) and
High Net-Worth Individuals (HNIs) to reduce tax
risks and deepen the tax base in such groups of taxpayers. The CBDT also
exchanges information with the FIU-IND and other regulators in order to
increase coordination. It also monitors matters related to the FATF and other
bodies dealing with AML/CFT having effect on direct taxes.7
Income
Tax Department: This department has the authority to
impose taxes on undisclosed foreign income and assets held by Indian residents
to prevent the crime of money laundering.
The
Central Board of Indirect Taxes and Customs (CBIC)
The CBIC has been
designated as the regulatory body for DPMS and the real estate sector, as these
sectors are covered under the ambit of DNFBPs under the PMLA. In light of this,
the CBIC has issued AML/CFT guidelines for both sectors. The AML/CFT guidelines
for Real Estate sector dated May 4, 2023 prescribe for categorization of
clients into high-risk and low-risk based on their location, nature of
business, trading turnover, etc., and directs the reporting entities to conduct
risk assessment of clients who are non-resident, HNI, trusts, charities, NGOs,
etc
Registrar of Companies (RoC):
As per the
new requirement under the Companies Act 2013, every Indian company, whether
private and public, is mandated to file with the RoC a record of the company’s
significant beneficial owners (in eForm MGT-6).
Special Courts
Special Courts have been set-up in a number of States / UTs by the Central Government to conduct the trial of the offences of money laundering. The authorities under the Act like the Director, Adjudicating Authority and the Appellate Tribunal have been constituted to carry out the proceedings related to attachment and confiscation of any property derived from money laundering.
In order to enlarge the scope of this Act and to achieve the desired objectives, the Act provides for bilateral agreements between countries to cooperate with each other and curb the menace of money laundering. These agreements shall be for the purpose of either enforcing the provisions of this Act or for the exchange of information which shall help in the prevention in the commission of an offence under this Act or the corresponding laws in that foreign State.
In certain cases the Central Government may seek/ provide assistance from/to a contracting State for any investigation or forwarding of evidence collected during the course of such investigation. The Act provides for reciprocal arrangements for processes/assistance with regard to accused persons.
Fraud Risk Management
The Reserve Bank of India (RBI) issued revised Master Directions on Fraud Risk Management in July 2024, superseding previous guidelines and consolidating 36 existing circulars. These comprehensive directions apply to a wide range of regulated entities, including commercial banks, cooperative banks, and non-banking finance companies.
Happy Reading
Readers who read this, also read:
1. Preventive Legislations ML/FT - Major Countries/Regions : USA
2. Preventive Legislations ML/FT - Major Countries/Regions : UK
3. Preventive Legislations ML/FT - Major Countries/Regions : Europe(EU)
4. Preventive Legislations ML/FT - Major Countries/Regions : Selected Countries
5. National Risk Assessment : India
Comments
Post a Comment