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How India prevents money laundering

February 19, 2014 13:24 IST

Photographs: Reuters Harkishn Mourjani and Nupur Pavan Bang

The Indian government has taken a number of measures to curb money laundering.

India has been classified as high risk zone in terms of money laundering

Out of 140 countries, India was ranked 70th in 2013 and 93rd in 2012, by the Anti Money Laundering (AML) Basel Index.

This clearly shows that India, in the present-day scenario, is very vulnerable to money laundering activities.

Many acts exist in India, which directly or indirectly curbs money laundering activities. 

A few of such acts are:

  • 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 

They proved to be inadequate in the treatment of money laundering matters. To curb the instances of Money Laundering, the Prevention of Money Laundering Act (PMLA) was introduced in the Lok Sabha on 4th August 1998 and was ultimately passed on 17th January 2003.  

Apart from the PMLA, there are other steps taken by the government to ensure that the instances of money laundering are prevented.


How India prevents money laundering

Photographs: Reuters

A few of them are discussed here:  

Financial intelligence Unit (FIU)

The Financial intelligence Unit (FIU) operates in the legal framework established by the PMLA. FIU performs the basic functions of receipt, analysis and dissemination of information in accordance with the international standards set up by the Financial Action Task Force (FATF) and Egmont Group of FIUs.

As prescribed under the PMLA, FIU receives reports on cash transactions, suspicious transactions, counterfeit currency transactions and funds received by non-profit organisations.

These reports are filed by reporting entities i.e. banks, financial institutions and capital market intermediaries, casinos, private locker operators, registrar to an issue of shares and dealers in precious metals.

FIU maintains a database and shares these reports with various agencies.


How India prevents money laundering

Photographs: Reuters

Know your Customer (KYC) Guidelines

The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities.

In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc., the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account.

The KYC guidelines were introduced by RBI in 2002, and all banks were instructed to be compliant by 31st Dec 2005.

This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof. Mandatory details required under KYC norms are proof of identity and proof of address.

There have been many instances of KYC norms being flouted and there is need for the RBI to make the system more robust.

A few examples of such instances are:

An individual investor, Roopalben Panchal, opened as many as 6,315 demat accounts with the National Securities Depository Ltd (NSDL) in benami names.

She received 150 shares each from 6,315 allottees through off-market transactions, 9,47,250 shares in aggregate, which were subsequently transferred to six accounts, five of which sold the shares on listing to make a handsome profit of Rs 1.37 crore.

Similar modus operandi was used by certain investors during the IPO of Infrastructure Development Finance Company (IDFC).


How India prevents money laundering

Photographs: Reuters

Recent Changes in Prevention of Money Laundering Act (PMLA)

Definition of “Activities of Terrorism” was not present in PMLA 2002, however the same was included in 2010 as “Transaction involving financing of the activities relating to terrorism includes transaction involving funds suspected to be linked or related to, or to be used for terrorism, terrorist acts or by a terrorist, terrorist organisation or those who finance or are attempting to finance terrorism.” 

Until 2010, the enactment allowed protecting identity of beneficial owners, who could be represented by lawyers and accountants. However, it has been abolished as a part of the recent amendments made to the act in 2013.

RBI and IRDA did not have any provision to address cases for filling Suspicious Transaction Report to Financial Monitoring Unit. Circulars have been issued by both institutions to address the deficiency.

The earlier provisions of the Act lacked the prowess for due legislative action. Hence, the scope was broadened in 2013 to include concealment, possession, acquisition or use of property, and projecting or claiming it as untainted property. Commodity future brokers have also been included within the scope of the Act now.

The recent changes in the PMLA are welcome as a report from Global Financial Integrity, published in December 2013, reported that the total black money outflow from India was nearly $343 billion during 2002-2011. 

Harkishn Mourjani, Senior Associate, Quadrisk Advisors Pvt Ltd and Nupur Pavan Bang is Head - Analytics, Insurance Information Bureau of India.