Fixing India’s Anti-Money Laundering Regime

In the past year, India has been among the most zealous countries in the world in stepping up the fight against money laundering and related economic and security issues. The effort that probably got the most attention was last year’s surprise “demonetization” policy (discussed by Harmann in last week’s post), which aimed to remove around 85% of the total currency in circulation. But to assess India’s overall anti-money laundering (AML) regime, it’s more important to focus on the basic legal framework in place.

The most important legal instrument in India’s AML regime is the Prevention of Money Laundering Act, which was enacted in 2002, entered into force in 2005, and has been substantially amended since then. The Act defines a set of money laundering offenses, enforced by the Enforcement Directorate (India’s principal AML agency), and also imposes a range of reporting requirements on various institutions. Furthermore, the law gives the Enforcement Directorate the authority to freeze “tainted assets” (those suspected of being the proceeds of listed predicate offenses), and to ultimately seize those assets following the conviction of the defendant for the underlying offense.

How effective has India been in its stepped-up fight against money laundering? On the one hand, over the past year (since the demonetization policy was announced), banks logged an unprecedented increase of 706% in the number of suspicious transaction reports (STRs) filed, and reports from last July indicated that the total value of the assets frozen under the Prevention of Money Laundering Act in the preceding 15 months may have exceeded the cumulative total of all assets frozen in the prior decade-plus of the law’s operation. And the government further reported that its crackdown on shell companies had discovered around $1.1 billion of unreported assets.

Yet these encouraging numbers mask a number of serious problems with India’s AML system, problems that can and should be addressed in order to build on the momentum built up over the past year. Here let me highlight two areas where greater reform is needed:

  • First, the most important challenge facing India’s AML efforts is one that plagues the entire Indian judicial system: delay. Along with all the impressive-sounding statistics regarding intensified AML enforcement stands the rather embarrassing fact that India has managed a grand total of one conviction under the Prevention of Money Laundering Act—and that conviction came in January 2017. Judicial delay may be especially harmful in the AML context, because this delay defers the ultimate disposition of the tainted assets, both adversely affecting the government interests in these assets, and also infringing on the accused individual’s right to property. Keeping valuable assets such as real estate unused is also economically inefficient. India’s AML law already incorporates all the usual legislative tools to ensure money laundering cases are processed quickly—dedicated AML courts, reversed burdens of proof, and fewer offense elements—yet it is not working. To address this problem, India should adopt strict rules requiring courts to dispose of AML cases within fixed time limits. Proposals along these lines for criminal trials more generally have failed to get off the ground for a number of reasons, including the heavy caseload of the regular courts, and the fact that defendants typically benefit from delays (thus creating a natural constituency to resist strict deadlines for case dispositions). Yet these factors don’t apply to the same extent in the AML context: the AML courts try far fewer cases, and defendants who expect acquittal may prefer a quick resolution, as this is the only way for them to get their frozen assets back.
  • Second, India’s AML regime continues to exclude industries that have a high risk of money-laundering, such as real estate and precious metals, from the list of “Designated Non-Financial Businesses and Professions” subject to AML reporting and other rules. Although in 2013 India amended the Act so that these industries could be covered, the AML reporting requirement extends to these industries only if the government chooses to do so via an executive order—and the necessary orders have not yet been issued. Recent developments have been a case of one step forward, two steps back: A 2016 law promised to expand AML operations into the real estate sector, but a majority of states continue to delay implementation of the framework, rendering it toothless. And while the government finally brought jewelers within the AML network in August 2017, following news reports on how gold smuggling was being used to circumvent demonetization, that decision was reversed within two months. The Indian government must abandon this equivocal and ineffective approach to the problem and enact the necessary laws and regulations required to bring all industries with a high money laundering risk within the AML regime.

India’s next evaluation by the Financial Action Task Force is four years away, and there is much work that needs to be done. If AML remains as high on the political agenda as it is now, then one hopes the system is up for scrutiny in better health by then.

5 thoughts on “Fixing India’s Anti-Money Laundering Regime

  1. Thanks for this insightful post, Abhinav. I was just wondering what the basis was of excluding industries from the scope of AML? Are there any other countries in the world that have a similar approach?

    • Hi Shanil. So, the AML regime requires certain compliance procedures to be installed which means (i) costs for the industry in question, and (ii) some sort of organized structure to administer the compliance and tackle failures. In India the official basis was that the industries did not have a good organizational framework in place, making it hard to create a compliance system. The unofficial reason would be that keeping these industries out of the AML system helped those wielding the levers of power since they used these industries for laundering assets.

      As for the second part of your question, several countries stagger the implementation of these compliance systems on industries because of the cost aspect. A good guide on current practices can be found in the mutual evaluation reports of the Financial Action Task Force.

  2. Thanks for your excellent analysis, Abhinav. Does the Task Force have a punitive / regulatory fine role in getting banks to comply with the anti-money laundering measures? Also, you mention a 705% increase in reporting (which seems to be great news), but what is this an increase from?

    • Hi. The Financial Action Task Force doesn’t take on local enforcement but recommends countries follow certain norms, and regulatory fines are one such norm that it recommends. As for the 705% increase, it is from more banks filing Suspicious Transaction Reports (STRs). It requires some suspicion that the transaction has some nexus with crime, but it often has been seen in practice that bankers file STRs as a matter of course, when dealing with high-value cash transactions. So I can’t be sure whether the increase in reporting has any actual gain for enforcement.

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