Busting money laundering-terror link

In recent years, financial miscreants have cast themselves wider by accommodating and abetting the gory, duplicitous world of terrorism. This has necessitated a corresponding enlargement of the brief of the official sleuths like the Paris-based Financial Action Task Force (FATF), an inter-governmental agency with a mandate to initiate and support national and international policies aimed at curbing money laundering (ML).

The need for strengthening the global anti-ML infrastructure had been felt even earlier but September 11 triggered the FATF decision to widen its role to include combating of terrorist financing. Therefore, in addition to the original 40 recommendations, FATF unveiled nine special recommendations to combat financing of terrorism in 2003 for the member countries (33 now) to follow.

FATF-styled bodies like the Asia-Pacific Group (APG) on ML, Europe’s Moneval and the Caribbean Financial Action Task Force promptly followed suit.

“This is a serious turn,” said Arun Goyal, director, financial intelligence unit-India (FIU-IND), the central agency in the country entitled to receive, process, analyse and disseminate information on suspect financial transactions.

Currently, India is not a member of FATF but is among three countries with observer status, normally a prelude to membership, along with China and South Korea. FIU-India was set up in November 2004 under the Prevention of Money Laundering Act (PMLA) 2002, the core of the legal framework to combat ML but it moved to a separate office and commenced almost full-fledged operations in March 2006.

What FIU-IND does? Its core function is to maintain a database on cash transactions and also “suspicious transactions”, analyse it and give the information to relevant domestic law enforcement agencies, regulators as well as FIUs in other countries. The agency gets basic information from a wide spectrum of reporting entities, such as SBI, public and private banks, cooperative banks, regional rural banks, FIs including insurance, housing finance and chit fund companies, NBFCs, FIIs, VC funds, financial intermediaries like stock brokers, share transfer agents, merchant bankers, depositories, portfolio managers etc.

There are over 40,000 entities that provide information on cash and suspicious transactions to FIU-IND now. These agencies conduct due diligence on their own to select the data to be reported. Till now, more than 18 lakh cash transactions and about 650 suspicious transactions have been reported to FIU-IND.

Compliance with Know-Your-Customer norms is an obligation under PMLA, in addition to anti-ML provisions. Financial sector regulators such as RBI, Sebi, Irda issued directives to all entities under their regulatory gaze in Feb-March 2006, asking them to provide data to FIU-IND. On its part, FIU-IND interact with the reporting agencies on a regular basis to apprise them of the data that could be shared. For instance, if credit and debit transactions in a back account exceeds Rs 10 lakh in a month, the agency could get the report.

FATF and bodies like APG regularly update the their prescriptions for financial transactions reporting with a view to combat ML and the network of terrorist financing. They also periodically propose changes in national laws to counter ML more effectively.

To become an FATF member, India has been undergoing rigorous evaluation by the world body. Bringing PMLA and the setting up of FIU-IND themselves are part of the process to get into FATF. In March 2005, APG carried out mutual evaluation of India’s compliance with FATF’s 40+9 recommendations even as the country is holding the observer status. There will be another such appraisal soon before the membership is granted.

To facilitate reporting by various financial sector entities and enable them to develop an alert system of potentially suspicious transactions, the government is planning to set up a new computer architecture which will allow electronic automatic and non-automatic reporting to FIU-IND. There needs to be way to track “integrally connected transactions”.

FIU-IND has just appointed Ernst & Young to define the broad contours of a software system which will filter the vast pool of information in the financial system. The idea, according to Mr Goyal, is to ensure that the global practices are adhered to. The proposed system is expected to ensure security of the information with FIU-IND.

In line with the E&Y’s prescription, a system integrator could be appointed later. Once the system is in place, the reporting entities will be able to send information directly to a national server, through a secured gateway. The system will also provide automatic alerts.

FIU-IND is able to provide very specific information to the respective law enforcement agencies while other information systems like the annual information returns are comparatively more general. Recent regulatory actions like Irda’s decision to make payment by cheque mandatory for insurance premiums beyond Rs 50,000 are consequent to alerts by FIU-IND.

“Since law enforcement agencies have very limited access to financial information, FIUs are gaining importance internationally,” said Mr Goyal. The agency is also contemplating to make reporting of remittances above a threshold mandatory by the agencies concerned. Another plan is to develop more efficient data warehosuing and new mining tools.

FIU-IND is set to be a member of Egmont Group, an informal international gathering of FIUs. There are already 101 members in the group and being in it enables an FIU to exchange information with its counterparts abroad. A legal working group of Egmont Group has already evaluated the level of legislative compliance of India with regard to ML and combating of terrorist financing.

Giving law enforcement agencies in foreign countries information on bank account and brokerage records, beneficial ownership, etc, is expected to lead to a major breakthrough in combating money laundering, which has become a larger menace due to the increasing complexities of the financial world.