In today's interconnected global economy, safeguarding the integrity of financial systems against money laundering and terrorist financing is crucial. The Financial Action Task Force (FATF) stands at the forefront of this battle, setting international standards and conducting rigorous evaluations of member countries' adherence to these norms. For India, a member since 2010, navigating this regulatory landscape has been both a challenge and an opportunity to bolster its financial defences.
The recent Mutual Evaluation Report, adopted at the FATF plenary in Singapore from June 26 to 28, 2024, placed India in the 'regular follow-up' category, alongside only four other G20 nations. This classification marks a significant milestone in India's ongoing efforts to combat illicit financial activities, such as money laundering (ML) and terrorist financing (TF). FATF country reviews comprehensively assess a nation's financial system and its efforts to combat money laundering and terrorist financing. These assessments scrutinise multiple facets, such as the legal framework, regulatory oversight, enforcement mechanisms, and the practical effectiveness of these measures.
India's journey has been marked by proactive measures to transition from a cash-based to a digital economy, thereby minimising ML/TF risks. The adoption of digital financial systems, complemented by stringent regulations on cash transactions and initiatives like the JAM (Jan Dhan, Aadhaar, Mobile) Trinity, has not only enhanced financial inclusion but also made transactions more secure and traceable.
Despite these advancements, the FATF has underscored the need for India to bolster oversight in certain non-financial sectors-a critique amidst broader commendation. As a key player among major economies within the FATF, including the US, Japan, and the European Union, India has been regularly refining its legislative framework and enforcement mechanisms to meet international standards effectively.
Since 2014, legislative reforms and heightened enforcement efforts have aligned India closer to these standards, yielding tangible results in dismantling terror funding networks and curbing the illicit flow of funds and narcotics. Collaboration across governmental agencies, including the Department of Revenue and various ministries, underscores India's concerted effort to fortify its anti-money laundering and counter-financing of terrorism (AML/CFT) framework.
Amid criticism from non-governmental organisations alleging misuse of counter-terrorism measures against NGOs and policy think tanks by India, the FATF has emphasised India's need to adopt a "risk-based approach" in implementing counter-terrorism financing measures within the non-profit sector.
One of the positive aspects that could have also worked positively in India's FATF review was its proactive stance on crypto assets as a risk to financial systems. By flagging this issue and bringing it to the forefront at the International Monetary Fund (IMF) annual summit, India demonstrated its commitment to addressing emerging global and connected financial threats. Although cryptocurrency remains in a regulatory and legal gray area in India, with no clear guidelines yet established, the government has taken steps to tax these assets. This approach reflects India's awareness and willingness to engage with complex financial innovations, contributing positively to its FATF evaluation.
It remains to be seen whether India will tighten the use of Participatory Notes (P-notes) for investments into the country. These instruments, known for their opacity regarding ultimate investment ownership, pose a risk by potentially facilitating the influx of hot money into the market. Over time, this lack of transparency can lead to increased volatility and undermine the stability of India's financial system.
India's commendable technical compliance, highlighted in the FATF evaluation, signifies its robust understanding of financial risks associated with money laundering and terrorism financing. Moreover, this achievement is poised to enhance investor confidence and expand global market access, notably supporting India's Unified Payments Interface (UPI) on a global scale.
Countries that receive favourable FATF ratings become attractive destinations for safe and stable investments, which stimulate economic development and job creation through increased foreign direct investment (FDI). These ratings also contribute to lower risk premiums and borrowing costs in international markets, which are essential for funding development projects and managing public debt effectively. Moreover, a robust financial system endorsed by the FATF builds trust among trading partners, facilitating better trade terms and fostering stronger economic partnerships. Positive FATF ratings signal a transparent and stable financial sector, crucial for upholding public confidence in financial institutions and maintaining economic stability. Furthermore, nations recognised for their effective measures against financial crimes gain influence in international policy-making arenas, enabling them to shape global financial regulations and promote their national interests.
India's evolving relationship with the FATF reflects not only its commitment to global financial integrity but also its role in shaping international standards that underpin economic stability and growth. As a large global economy, India is now leading the narrative with its own house in order, and in seeking rest of the world to do so. The journey ahead promises continued collaboration and adaptation, essential in safeguarding financial systems against emerging threats in an increasingly interconnected world.
Dr. Srinath Sridharan - Policy Researcher & Corporate Advisor
X : @ssmumbai
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