Gearing up for enhanced AML regulations

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By Arpinder Singh, Partner and National Director and Vikram Babbar, Senior Manager

Eliminating money laundering has been a huge challenge for banking and financial systems especially with the increased interlinkages of global financial systems. As per an estimate of the International Monetary Fund, the aggregate size of money laundering in the world could be somewhere between two and five percent of the worlds gross domestic product. This could be between $800 billion - $2 trillion each year.

Thereby, all over the world, the need has been recognized to control this form of illegal activity, which involves the misuse of financial systems all around the world.

India has recently been granted the membership of Financial Action Task Force (“FATF”) and is now a “Full-fledged member” as against the “Observer” status after four years of committed and coordinated hard work.

FATF, whose 40+9 principles form the basis of most international responses to money laundering activity, is looked upon as a facilitator for the development and promotion of policies to combat money laundering. Compliance with these principles is now seen as a requirement for any financial service entity.

All countries are also required to conform to the recommendations made by the FATF and are to be monitored and evaluated with respect to international standards. Such monitoring is to be done by the FATF as well as by the World Bank and the IMF.

Importance of the membership
The membership would aid India in its quest to become a major player in the International finance. It will help to build the capacity to fight terrorism, trace terrorist money and successfully investigate and prosecute money laundering and terrorist financing offences. It would allow gaining easy access to real-time exchange of information on money laundering and terrorist financing. India will also benefit in securing a more transparent and stable financial system by ensuring that financial institutions are not vulnerable to penetration or abuse by organized crime groups.

The relevance of membership is further enhanced, as with a strongly growing economy and demography, India faces a range of money laundering and terrorist financing risks. The main sources of money laundering in India result from a range of illegal activities committed within and outside the country, viz. fraud, counterfeiting of currency, drug and human trafficking and corruption.

India FATF compliance status – what does it indicate?
The Evaluation Team assigned ratings on each of the FATF recommendations based on India’s level of compliance. Out of 40+9 recommendations, India has fully complied with 4 (8%) and largely complied with 21 (51%).

However, more than 40% of the recommendations are either partially complied or not complied with. Those partially complied or not complied largely relate to:

  • Preventive measures (in the 40 category) like Customer due diligence (CDD), PEP screening, Suspicious Transaction Reporting(STR) and Regulation, Supervision and Monitoring
  • Combating Financing for Terrorism (in the 9 category) like Criminalizing terrorist financing, Non-profit organizations, Cross border declaration and disclosure

Though the report has acknowledged the regulator’s serious commitment to combating all forms of terrorism; however, as indicated above, several provisions need to be brought more closely in line with the FATF standards and the same would reflect on the level of preparedness of Indian financial institutions especially banks.

This implies that as a next step, banks would have to clearly demonstrate their efforts on areas of short-comings, a few of them being – broadening the CDD obligations related to beneficial ownership with clear and specific measures and enhance the effectiveness of STR reporting. From the Regulator’s side, greater supervision and increased sanction for non-compliance with AML/ CFT requirements would be the proposed way forward measures to reap benefits of the membership.

Conclusion
Though India has clinched the membership through coordinated efforts from the Regulators, it still has to go a long way in complying with all recommendations and to gain from the success of attaining membership.  The FATF compliance status clearly indicates enhanced regulatory oversight and policy measures thereby leading to greater levels of monitoring and supervision than before.

The article was jointly contributed by Arpinder Singh, Partner & National Director, Fraud Investigation & Dispute Services (FIDS), EY and Vikram Babbar, Senior Manager (FIDS)

First Published in The Economic Times print edition