National Risk Assessment (NRA): India
India's National Risk Assessment (NRA) is an
ongoing exercise to identify sectors that are vulnerable to money laundering
and terrorist financing (ML/TF). The NRA is based on recommendations from the Financial Action
Task Force (FATF) and helps inform policy-making, resource allocation, and the
implementation of effective AML/CFT measures. The NRA also ensures that national strategies address both domestic and
international threats.
The NRA provides a foundation for informed policy-making,
resource allocation, and the implementation of effective AML/CFT measures. It ensures that national strategies are aligned with the
specific risk landscape of the country and that they address both domestic and
international threats.
The subject matter of NRA was discussed in the Anti-Money Laundering
Steering Committee (AMLSC) set up with the approval of Finance Minister, and it
was decided to conduct the NRA following the World Bank methodology. The
Methodology requires setting up of a Working Group at the apex level, to be
assisted by 8 teams, one each for Threat, Vulnerability, Banking Sector,
Insurance Sector, Capital Market Sector, Other Financial Institutions, DNFBPS
and Financial Inclusion. The AMLSC, in its meeting in March, 2015, further
decided that the Working Group will be constituted by expanding the AMLSC and
including the representatives from MHA (JS-IS), IB and NIA as well as other law
enforcement agencies such as CBI and NCB. It was also decided that Threat and
Vulnerability Assessment for Money Laundering will be headed by DOR and for
terrorism financing will be headed by MHA. Accordingly, the teams have been
constituted and the preliminary exercise for the National Risk Assessment
commenced. FIU-IND is playing a central role in the NRA and is represented on
all the teams.
Ministries, departments and agencies involved in the
National Risk Assessment
1. Department of Revenue
(DoR)
2. Department of Economic
Affairs (DEA)
3. Enforcement
Directorate (ED)
4. Financial
Intelligences Unit – India (FIU-IND)
5. Central Board of
Direct Taxes
6. Directorate General of
Revenue Intelligence (DGRI)
7. Directorate General of
Central Excise Intelligence
8. Directorate General of
Foreign Trade
9. Serious Frauds
Investigation Office
10. Reserve Bank of India
(RBI)
11. Securities and
Exchange Board of India (SEBI)
12. Insurance Regulatory
and Development Authority (IRDA)
SFIO
SFIO was set up in the backdrop of
stock market scams of 2000-02, phenomena of plantation companies and vanishing
companies and failure of non-financial banking companies.
The Vajpayee Government decided to
set up SFIO on 9 January 2003, based on the recommendation of Naresh Chandra
Committee on corporate governance (appointed by the Government of India in
2002) and in the backdrop of stock market scams as also the failure of
non-banking companies resulting in a huge financial loss to the public.
Powers of SFIO
As per the resolution of 2nd July
2003, SFIO is to take up only the investigation of frauds characterized by:
- Complexity,
having inter-departmental and multi-disciplinary repercussions.
- Significant
involvement of public interest to be judged by size, either in terms of
monetary malpractice or in terms of the persons affected.
- The
potential of investigations leading to, or assisting towards, a clear
improvement in systems, laws or procedures.
As per the Companies Act, 2013, Serious Fraud Investigation Office
(SFIO) has been established through the Government of India vide Notification
No. S.O.2005(E) dated 21.07.2015. It is a multi-disciplinary organization under
the Ministry of Corporate Affairs, consisting of experts in the field of
accountancy, forensic auditing, banking, law, information technology,
investigation, company law, capital market and taxation, etc. for detecting and
prosecuting or recommending for prosecution white-collar crimes/frauds.
Investigation into the affairs of a company is assigned to SFIO, where
Government is of the opinion that it is necessary to investigate into the
affairs of a company –
1. on receipt of a
report of the Registrar or inspector under section 208 of the Companies Act,
2013
2. on intimation of a
special resolution passed by a company that its affairs are required to be
investigated
3. In the public
interest; or On request from any department of the Central Government or a
State Government
4. SFIO is headed by
a Director as Head of Department in the rank of Joint Secretary to the
Government of India.
The Director is assisted by Additional Directors, Joint Directors, Deputy Directors, Senior Assistant Directors, Assistant Directors Prosecutors, and other secretarial staff. The Headquarter of SFIO is in New Delhi, with five Regional Offices in Mumbai, New Delhi, Chennai, Hyderabad & Kolkata.
SFIO falls under
the jurisdiction of the Ministry of Corporate Affairs. The SFIO is involved in
major fraud probes. It coordinates with the Income Tax Department and the
Central Bureau of Investigation (CBI) for fraud investigation.
The government has
recently constituted a 12-membered high-level panel recently set up to prepare
an investigation manual for Serious Fraud Investigation Office (SFIO).
As per the recent
order issued by the Corporate affairs ministry, Corporate Affairs Secretary
Injeti Srinivas chaired the panel. The committee will devise a comprehensive
manual for performing effective investigations and probes against white-collar
crimes.
Financial Stability and Development Council (FSDC)
Be it opening a bank account, investing in a mutual fund or buying a life insurance policy, submitting your know-your-customer (KYC) details is a must. Just submitting it is not enough, you may also need to update your KYC documents multiple times in some cases. It can be a hassle for many individuals to repeat the KYC process multiple times. To reduce the paperwork, time and cost of thisprocess, the Financial Stability and Development Council (FSDC) has proposed to implement a uniform KYC system to verify customers across the financial sector. The central government has formed an expert committee under Finance Secretary TV Somanathan to make recommendations on uniform KYC norms, according to reports.
Finally in 2010, the then Finance Minister of India, Pranab
Mukherjee, decided to set up such an autonomous body dealing with macro
prudential and financial regularities in the entire financial sector of India.
An apex-level FSDC is not a statutory body. The recent global economic meltdown
has put pressure on governments and institutions across the globe to regulate
their economic assets. This council is seen as India’s initiative to be better
conditioned to prevent such incidents in future. The new body envisages to
strengthen and institutionalise the mechanism of maintaining financial
stability, financial sector development, inter-regulatory coordination along
with monitoring macro-prudential regulation' of economy. No funds are
separately allocated to the council for undertaking its activities
In 2018, India reported back to the FATF on the actions it had taken to strengthen its AML/CFT framework. As a result, the FATF rerated the country on 7 of the 40 Recommendations.
FIU-India
participates in the Joint Working Groups (JWGs) on Counter Terrorism set up by
the Government of India with various countries for evaluating the AML/CFT
vulnerabilities and national risk assessment for the country.
An important part of preparation for FATF mutual evaluation 2023 is conduct of National Risk Assessment (NRA) where risk of various sectors of the economy like Banking, Insurance, Capital Markets, Designated Non- Financial Business and Profession (DNFBP) sectors are assessed.
Working
Group to Review Red Flag Indicators(RFIs) on Capital Markets
In view of the significant increase in the trading volumes in the capital markets and rapid pace of transformation in this sector, it becomes essential to adopt FATF’s Risk Based Approach (RBA) and take steps to mitigate and address AML/CFT risks. Therefore, in order to conduct a comprehensive risk assessment in the Capital Markets sector and define supplemental guidelines in respect of new alert indicators, FIU-India constituted a working group in October, 2021. The working group constituted of the members from the following organizations:
a) SEBI
b) Exchanges –
NSE, BSE, MCX, MSEI, NCDEX
c) Depositories –
CDSL, NSDL
After
taking inputs from the members of the Working Group and latest global AML/CFT
aspects in the securities sector, a consolidated agenda was prepared for
reviewing the risks and defining new alert indicators. Further, since the
constitution of working group various meeting have been conducted through the
online mode followed by two-day physical meetings in Feburary, 2022 which were
held in BSE & NSE in Mumbai. The working group has identified the following
main issues to be addressed in these guidelines
a) Synchronized
Trading and Reversal Trades
b) Order book
manipulation (Order Spoofing)
c) Handling of
Client Funds and Securities by the Trading Members
d) Suspicious
Off-market transfers
e) Adverse
observations made by the stock exchanges during inspections
The Working Group finalized the new supplemental guidelines have been issued under the provisions of the Prevention of Money Laundering Act (PMLA) during the 2022-23 financial year and published in a recently released report [Apr 28, 2024]. The fresh set of 'alert indicators' includes capital markets, insurance companies, online payment gateway intermediaries and crypto currency service providers for effective checking of suspicious transactions in their channels as part of the anti-money laundering and counter-terrorism financing regime.
This is part of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime followed by the country as part of which financial institutions and intermediaries are mandated to share suspicious transaction reports (STRs) with the FIU which subsequently analyses them and shares them for action with various investigative and intelligence agencies.
FIU proactively engages with the financial sector regulators and reporting entities to understand emerging risks and to undertake immediate mitigating measures. In the case of capital markets, these supplemental guidelines have led to "a strategic shift in the manner in which FIU received information with respect to securities market transactions" . These 'alert indicators' will address "emerging risks" in the market infrastructure institutions (MIIs)-- stock exchanges and depositories-- like synchronised and manipulative trade practices, order spoofing, mis-utilisation of client funds by the stock brokers, suspicious off-market transactions etc.
Designated Non- Financial Business and Profession (DNFBP)
The Department of Revenue, Ministry of Finance, Government of India has constituted the DNFBPs Team under the Chairmanship of Special Director in the Enforcement Directorate for National Risk Assessment (NRA) exercise to assess the risks of various sectors of economy to have the self Assessment done by various segments on the vulnerability of their operations to Money Laundering. ICAI is also a member in the DNFBPs Team for National Risk Assessment (NRA) Exercise.
The Document National Risk Assessment (NRA) – Designated Non Financial Business
and Professions Vulnerability” Module 7 highlights
the followings under the role of Accountants, auditors, tax advisors.
- Buying
and selling of real estate;
- Managing
of client money, securities or other assets
- Management
of banks, savings or securities accounts
- Organization
of contributions for the creation, operation or management of companies;
- Creation,
operation or management of legal persons or arrangements and buying and
selling of business entities
Plugging the loop holes in the Legal System
The Union government on Thursday[24 March 2018] signalled a zero-tolerance approach to white-collar crime, approving a new law targeting economic offenders fleeing the country, and creating a regulator for chartered accountants and audit firms.
The actions, coming two weeks after Punjab National Bank (PNB) went public with a multi-billion dollar fraud, are part of a series of steps the government has initiated to mitigate the financial and political fallout of the scam.
These include banking and bankruptcy reforms, disqualification of directors of errant companies, striking shell companies off the records and stringent action taken by various regulators in the last few weeks against those who allegedly duped banks. These cabinet decisions are expected to create a deterrent to economic offenders fleeing the country and make auditors more accountable for their actions.
The Fugitive Economic Offenders Act 2018
The Fugitive Economic Offenders Bill 2018, which will be tabled when the budget session of Parliament resumes, provides for proclaiming an economic offender who has fled the country as a fugitive, issuing an arrest warrant against the person and confiscating his or her assets before conviction.
The bill provides for confiscating all assets of such offenders including any benami assets (held by proxies), not just the proceeds of crime. “In future, there will be a mechanism for international cooperation too. We will need an appropriate arrangement with other nations to confiscate overseas assets of such offenders,” Jaitley said.
Only offences above Rs100 crore will be pursued under the Fugitive Economic Offenders Bill 2018 in order to prevent overcrowding of courts.
National Financial Reporting Authority
At the same time, the government has decided to set up a National Financial Reporting Authority (NFRA) to regulate auditors. Creating such a body was first proposed in the Companies Act, 2013.
Once it is created, NFRA can impose a penalty of up to five times the fee received in the case of professional or other misconduct by individual chartered accountants and up to 10 times the fees received in the case of audit firms. It can also bar an auditor up to 10 years. NFRA will probe professional misconduct of auditors in all listed companies and in large unlisted companies, the size of which will be specified in the rule.
The current regulations have not been successful to get auditors to work independently. This body (NFRA) and the rules framed should achieve this objective. This should reinstate confidence in audits and financial statements of companies and financial institutions
PMLA 2002
Plugging the loop holes in MLA 2002, a series of amendments were made in 2023. In March 2023, the PMLA rules were amended, making it mandatory for banks and financial institutions to record financial transactions of politically exposed persons (“PEP”).
Also, financial institutions or reporting agencies were mandated to collect information on financial transactions of non-profit organizations or NGOs under the PMLA. The government also made
Know Your Customer (“KYC”) mandatory for crypto exchanges and intermediaries dealing with virtual digital assets.
Further, in May, the Finance Ministry had notified changes in Prevention of Money Laundering Act, 2002 (“PMLA”), provisions which made chartered and cost accountants and company secretaries liable under the anti-money laundering law for carrying out certain specified financial transactions on behalf of their clients.
The amendment Sept 04. 2023 covered the following:
The principal officer must be an officer at the management level: The Ministry amended Rule 2, PMLR 2005
Shareholding criterion of the beneficial owner of a company reduced to 10% of the total capital: To widen the scope of a ‘beneficial owner’, changes were made in Rule 9, PMLR 2005
Strict compliance and monitoring of client identity and records: To enhance transparency of clients of reporting entities such as banks and financial institutions, Rule 10, PMLR 2005. Not just updation, Both CDD & Transaction analysis data to be preserved
National Money Laundering/Financing of Terror Risk Assessment Committee
The Government of India had constituted a National Money Laundering/Financing of Terror Risk Assessment Committee to assess money laundering and terror financing risks, a National AML/CFT Strategy and Institutional Framework for AML/CFT in India. Assessment of risk of Money Laundering /Financing of Terrorism helps both the competent authorities and the regulated entities in taking necessary steps for combating ML/FT adopting a risk-based approach. This helps in judicious and efficient allocation of resources and makes the AML/CFT regime more robust. The Committee has made recommendations regarding adoption of a risk-based approach, assessment of risk and putting in place a system which would use that assessment to take steps to effectively counter ML/FT. The recommendations of the Committee have since been accepted by the Government of India and need to be implemented.
Accordingly, banks/FIs should take steps to identify and
assess their ML/TF risk for customers, countries and geographical areas as also
for products/ services/ transactions/delivery channels, in addition to what has
been prescribed in our Master Circular dated July 1, 2011, referred to in
paragraph 2 above. Banks/FIs should have policies, controls and procedures,
duly approved by their boards, in place to effectively manage and mitigate
their risk adopting a risk-based approach as discussed above. As a corollary,
banks would be required to adopt enhanced measures for products, services and
customers with a medium or high risk rating.
In this regard, Indian Banks' Association (IBA) has taken
initiative in assessment of ML/FT risk in the banking sector. It has circulated
to its member banks on May 18, 2011, a copy of their Report on Parameters for
Risk Based Transaction Monitoring (RBTM) as a supplement to their guidance note
on Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards
issued in July 2009. The IBA guidance also provides an indicative list of high
risk customers, products, services and geographies. Banks may use the same as
guidance in their own risk assessment.
These guidelines are issued under Section 35A of the Banking
Regulation Act, 1949 read with Rule 7 of Prevention of Money-laundering
(Maintenance of Records of the Nature and Value of Transactions, the Procedure
and Manner of Maintaining and Time for Furnishing Information and Verification
and Maintenance of Records of the Identity of the Clients of the Banking Companies,
Financial Institutions and Intermediaries) Rules, 2005. Any contravention there of or non-compliance shall attract penalties under B R Act, 1949.
India has achieved “high level of technical compliance” with the requirement of global anti-money laundering watchdog FATF, the agency said on Friday (June 29, 2024) even as it listed a number of measures that are needed to strengthen supervision and implementation of preventive measures in some of the non-financial sectors
India needs to address delays relating to concluding money laundering (ML) and terrorist financing (TF) prosecutions and ensure that CFT measures aimed at preventing the non-profit sector from being “abused” for TF are implemented in line with risk-based approach. FATF Comment on comes after the Enforcement Directorate (ED) in 2022 provisionally attached assets worth Rs 1.54 crore belonging to Indians for Amnesty International Trust (IAIT) in connection with its money laundering probe into the finances of Amnesty International and its related entities. ED’s case was based on a CBI FIR against Amnesty for alleged violation of the Foreign Contributions Regulatory Act (FCRA), 2010.
The Plenary concluded that India has reached a high level of technical compliance with the FATF requirements and its AML/CFT/CPF regime is achieving good results, including in its ML and TF risk understanding, international cooperation, access to basic and beneficial ownership information, use of financial intelligence, and depriving criminals of their assets and counter-proliferation financing measures.
However, improvements are needed to strengthen the supervision and implementation of preventive measures in some of the non-financial sectors. India also needs to address delays relating to concluding ML and TF prosecutions, and to ensure that CFT measures aimed at preventing the non-profit sector from being abused for TF are implemented in line with the risk-based approach, including by conducting outreach to NPO on their TF risks
The Mutual Evaluation Report of India, which was adopted in the
FATF plenary held in Singapore between June 26th and June 28th,
2024, places India in the ‘regular follow-up’ category, a distinction shared by
only four other G20 countries. This marks a significant milestone in the
nation’s efforts to combat money laundering (ML) and terrorist financing (TF).
Among other things, FATF has recognised the efforts made by
India on:
·
Mitigating the risks
arising from ML/TF, including the laundering of proceeds from corruption,
fraud, and organised crime.
·
Effective measures
implemented by India to transition from a cash-based to a digital economy to
reduce ML/TF risks.
·
Implementation of the
JAM (Jan Dhan, Aadhaar, Mobile) Trinity, along with stringent regulations on
cash transactions, has led to a significant increase in financial inclusion and
digital transactions; these measures have made transactions more traceable,
thereby mitigating ML/TF risks and enhancing financial inclusion.
India’s performance on the FATF Mutual Evaluation holds
significant advantages for 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 (UPI), India’s fast payment system.
This recognition from the FATF is a testament to the rigorous and effective measures implemented by India over the last 10 years to safeguard
its financial system from ML/TF threats. It underscores the country’s
commitment to international standards and its proactive stance in the global
fight against financial crimes. This sets a benchmark for countries in our
region to effectively implement international standards on terrorist financing. India’s
excellent rating will enhance the capacity of our country to lead the global
effort on countering cross border terror financing and money laundering.
Since 2014, the Government has enacted a series of legislative
changes and bolstered enforcement efforts to tackle ML, TF, and black money.
This multi-pronged strategy has brought these measures in line with
international standards and has demonstrably proven to be effective, yielding
positive results. Indian authorities have had success in dismantling the terror
funding network using actionable intelligence inputs. These operations have
stemmed the flow of terror funding, black money, and narcotics, even along the
coastline.
Over a two-year period, the Department of Revenue (DoR)
spearheaded India's engagement with FATF during the mutual evaluation process.
This success was driven by the exceptional efforts and invaluable
contribution of a diverse, multi-disciplinary team comprising representatives
from various ministries, the National Security Council Secretariat (NSCS),
state authorities, the judiciary, financial sector regulators, self-regulatory
organisations, financial institutions, and businesses all played a critical
role. This collaborative effort demonstrated India’s effective AML/CFT
framework.
India is already a member of the FATF Steering Group. India’s
current performance will provide India with an opportunity to contribute
significantly to the group’s overall functioning.
India remains committed to further strengthening its AML/CFT framework and continuing its collaboration with international partners to combat financial crimes. The nation will build on this success to ensure a secure and transparent financial environment for all.
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