Ahead of FATF Review, India Notifies changes under PMLA

Ahead of FATF Review, India Takes Measures to Implement Suggestions

The Indian government has recently taken some steps to fight against money laundering and terrorism financing. In May 2023, the Finance Ministry made some announcements related to this.

The Indian Government has made certain professionals, like accountants, responsible for reporting any suspicious financial activities. They also need to keep records of transactions and verify the identity of their clients. If something seems suspicious, they have to watch it more closely and keep the information for a long time. These measures are being taken before an evaluation of India’s actions by FATF in November 2023.

Here is an analysis of this news by the UCN Team to give you the key concepts and insights. These announcements were made so that India can follow the rules set by the international organization the Financial Action Task Force (FATF) better. The FATF will review how well India is fighting money laundering and terrorism financing in November 2023.

Latest News

  • In May 2023, the Finance Ministry notified chartered accountants, company secretaries and cost accountants as ‘reporting entities‘ under the Prevention of Money Laundering Act (PMLA).
  • The Ministry also brought 5 additional activities under the purview of the PMLA through another notification in the same month.
  • These notifications are aimed at strengthening India’s compliance with FATF standards before the upcoming review.

Overview

Key Takeaways: India Strengthens AML/CFT Compliance Ahead of FATF Review
SectionsDetails
Legislative Changes
  • Finance Ministry notified 3 types of accountants as reporting entities under PMLA in May 2023
    • Chartered accountants
    • Company secretaries
    • Cost accountants
  • 5 additional activities also brought under PMLA purview through notification
    • Formation agents of companies
    • Directors/secretaries of companies
    • Partners of firms
    • Similar positions in LLPs
Widening Scope
  • Commodities brokers now under PMLA
    • FATF recommendation from 2010 review
  • More DNFBPs brought under PMLA
    • Real estate agents
    • Dealers in precious metals/stones
    • Dealers in high-value goods
    • Safe deposit locker operators
  • AML/CFT guidelines issued for casinos (Jan 2013 – Goa casinos)
Strengthening Supervision
  • RBI increased AML/CFT inspections
    • 442 urban cooperative banks inspected between Jan-Mar 2013
    • 1,362 financial institutions inspected in the same period in 2022
  • SEBI reviewing penalties for KYC/AML violations
    • Making penalties more stringent
    • Commensurate with the seriousness of violations
  • IRDA modified inspection manual for focused AML/CFT inspections
Implementation Challenges
  • Low convictions under money laundering offense
  • Only 16 bank accounts frozen for terror financing in 2021 (238 in 2009)
  • Sanctioning of NPO sector needs strengthening
  • Monitoring fintech/crowdfunding sector required

Introduction

  • The Financial Action Task Force (FATF) is an inter-governmental body that sets global standards to combat money laundering and terror financing.
  • It regularly reviews its member countries to assess the compliance and effectiveness of their anti-money laundering and counter-terrorism financing (AML/CFT) measures.
  • India is set to undergo an on-site mutual evaluation by the FATF in November 2023. This follows a similar review conducted in 2010, after which the FATF had provided recommendations to India for strengthening its AML/CFT regime.
  • Ahead of the upcoming evaluation, India has taken several steps to implement the suggestions made by the FATF in 2010 and improve its compliance record.

India’s FATF Membership Details

AspectsDetails
FATF Member Since2010
Fourth Round Mutual EvaluationsPostponed to 2023 due to COVID-19 pandemic
Assessment SchedulePossible Review Period: Nov 2023
Possible Plenary Discussion: Jun 2024

Delegation and Authorities for FATF Assessment in India

Authorities/DelegationLead Ministry/Authority in the FATF Delegation
Head of DelegationMinistry of Finance: Department of Economic Affairs
Other Ministries/AuthoritiesCentral Board of Excise and Customs
Financial Intelligence Unit
Ministry of Law and Justice

Key Measures Taken by India

Legislative Changes

  • The key legislative step taken by India is the amendment of the Prevention of Money Laundering Act (PMLA) to expand the scope of ‘reporting entities‘.
  • In May this year, the Finance Ministry notified chartered accountants, company secretaries and cost accountants as ‘reporting entities‘ under the PMLA.
  • This requires these finance professionals to follow customer due diligence, transaction monitoring and suspicious transaction reporting requirements.
  • Another notification brought 5 additional activities under the purview of the PMLA as ‘designated businesses and professions‘.
  • These amendments implement the FATF recommendation to cover more Designated Non-Financial Businesses and Professions (DNFBPs) under India’s AML/CFT regime.

Strengthening Implementation

  • Regulators have enhanced their risk-based supervision of financial institutions and conducted more focused inspections for AML/CFT compliance.
  • The number of inspections by the RBI increased from 442 urban cooperative banks between January-March 2013 to 1,362 institutions in the same period in 2022.
  • The sanctioning powers available to regulators like SEBI have also been strengthened since the 2010 FATF review.
  • The penalties for non-compliance with KYC and AML/CFT norms have been made more stringent and commensurate with the seriousness of violations.

Widening Scope

  • Commodities brokers and more Designated Non-Financial Businesses and Professions (DNFBPs) like real estate agents have been brought under the scope of the PMLA since the 2010 review.
  • Specific AML/CFT guidelines have also been issued for casinos and other DNFBPs like in January 2013 for casinos operating in Goa.
  • Regulators have conducted outreach programs in relevant sectors to raise awareness about new obligations.

Analysis of Progress Made

  • India has taken measurable steps to comply with the recommendations provided by the FATF in 2010.
  • While the full effectiveness of the recent legislative and regulatory changes can only be gauged over time, they address a number of technical compliance requirements highlighted previously.
  • The increase in inspections and penalties by regulators indicates better oversight of financial institutions and DNFBPs.
  • The number of suspicious transaction reports filed by regulated entities has also increased in recent years, showing more vigilance.

However, some implementation challenges persist

  • Convictions under the money laundering offense remain low despite a higher number of investigations and prosecutions.
  • The number of bank accounts frozen under UAPA provisions for terror financing also reduced from 238 in 2009 to just 16 in 2021.
  • Some TF-related recommendations like applying more effective sanctions in the NPO sector need further action.
  • There are also calls for widening the scope of AML/CFT supervision to fintech companies and crowdfunding platforms.

Final Thoughts

In the UCN team’s view India has taken sufficient measures.

  • India has taken substantial steps to implement FATF recommendations since its last mutual evaluation in 2010.
  • Legislative changes, coupled with strengthening oversight of financial institutions and widening the ambit of regulation, has improved technical compliance.
  • India will likely showcase its progress to the FATF assessment team as proof of its commitment to global AML/CFT standards.
  • However, the assessors may probe the real impact of regulations on the ground during the on-site review in November.
  • Genuine effectiveness will ultimately depend on robust supervision, detection, investigation and prosecution by all entities involved in the AML/CFT chain.
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