Context: Government has recently declared that Rs 500 and Rs 1000 notes would no longer be a legal tender. The decision has been taken in the context of curbing the black money and to tackle the challenge of terror financing and money laundering.
Introduction:
- Money laundering and the financing of terrorism are financial crimes with economic effects. They can threaten the stability of a country’s financial sector or its external stability.
- Action to prevent and combat money laundering and terrorist financing thus required not only to a moral imperative, but also to an economic need.
Financial Action Task Force:
- The Financial Action Task Force (FATF) established in 1989 at a Group of Seven (G7) Summit held in Paris.
- It recognized the need to step up efforts to ensure strict action on illicit financing of crimes such as terrorism and prevent attempts to conceal or disguise the identity of illegally based profits.
- The objectives of the FATF is: to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
- It acts as a policy-making body working to bring about national legislative and regulatory reforms in these areas.
- India is a full time member of FATF.
The challenge of terror financing:
Understanding the sources of Terror Financing facilitates the overall ability to understand terrorists and their methods. This, in turn, helps in the overall goal of defeating terrorism.
- Money employed for the terror financing, unlike money laundering, can come from legal sources.
- It remains a contradiction, wherein terrorism is inherently illegal while Terror Financing, unless proved and linked with terrorism, could continue to remain a completely legal process.
- Terror Financing rides over a financial network that is seamless and transcends geographical boundaries. This implies the application of multiple laws in different countries, which often makes prosecution complicated and creates lacunae in interpretation.
- Collection of funds for charitable purposes is often a sensitive issue in most countries. This can also have religious overtones, which makes its regulation challenging.
- Most acts of terrorism require very little funding to execute. Therefore, the pursuit of large and abnormal fund transfers with an aim of stalling such attacks is likely to result in failure.
Terror Financing has evolved faster than most monetary systems and regulatory mechanisms. From the use of age old systems like hawala for transferring value to e-commerce in the cyber world have led, more often than not, to enforcement agencies playing catch-up. A recent report indicated the increasing possibility of ‘digital laundering’ as a result of increasing use of digital currency.
Money laundering in India:
Money laundering has been evolved as a serious concern in India considering the fact that the country is one of the largest growing economies in the world.
Illegal activities committed within and outside the country, like drug trafficking; fraud, counterfeiting of Indian currency; transnational organised crime; human trafficking; and corruption are the sources of money laundering in India.
In case of domestic crimes, the most common money laundering methods are;
- opening multiple bank accounts,
- intermingling criminal proceeds with assets of a legal origin,
- purchasing bank cheques against cash, and
- routing through complex legal structures.
In the case of transnational organised crimes, money laundering methods are;
- the use of offshore corporations
- trade based money laundering
- terrorists also use hawala (illegal) transfers to move money within and outside the country.
India’s effort to tackle terror financing and money laundering:
- Unlawful Activities (Prevention) Act, 1967 (UAPA): It was amended in 2004 to criminalize terrorist financing. It was further amended in 2008 to broaden its scope and confirm with the requirements of the United Nations Convention on the Suppression of the Financing of Terrorism.
- The Foreign Contribution (Regulation) Act, 1976 dealt with regulating the acceptance and utilization of foreign contribution and foreign hospitality by persons and associations working in the important areas of national life.
- Foreign Exchange Management Act (FEMA), 1999 was enforced to regulate the development and maintenance of foreign exchange market.
- The Prevention of Money Laundering Act, 2002 (PMLA) which came into force in 2005 and amended in 2009 and 2012 was introduced to counter the trend of money laundering.
India has adopted its own model to fight money laundering and terrorist financing based on its specific domestic and regional considerations.The Financial Intelligence Unit-India (FIU-IND) established under the Ministry of Finance in 2004 receives, analyses and disseminates information relating to suspicious financial transactions involving suspected money laundering and terrorist financing to Intelligence / Enforcement Agencies and Regulatory Authorities.
A special cell called Combating Financing of Terrorism (CFT) Cell was created in the Internal Security Division of MHA in 2011 to coordinate with Central Intelligence Enforcement Agencies and the State Law Enforcement Agencies to develop an integrated approach to tackle the problem of terror funding.
To enhance the functionality of the FATF in India, government agencies have launched a National Risk Assessment exercise on January 2016 so as to identify the sectors that are most susceptible to money laundering and terror funding and thereby plug deficiencies, if any. This conforms with the FATF recommendations.
Recently, Government’s decision to demonetize the 500 and 1000 rupee notes is one of the landmark decisions which can directly hit terror financing activities.
What should be done?
- Measures should be undertaken at the national level, and they can be complemented by strengthening cooperation at the local level to create constrictions for terrorist financing and money laundering.
- Better information sharing between states and the centre on national risk assessment and threats is desirable.
- There is also need for financial data by which rogue companies and individuals indulging in money laundering can be identified.
- Implementation of a monitoring system and a system of proper checks and balances can help ensure that money laundering is prevented in the real estate sector.
- Adherence to KYC norms needs strict compliance.
- In order to bring transparency in receipt and use of foreign donations, random checks can be undertaken to verify the last five years’ transactions of select non-governmental organisations having dubious records.
- Agencies such as Serious Fraud Investigation Office and Central Economic Intelligence Bureau need to be strengthened to take up this aspect of terrorist financing.
Conclusion:
India has taken important steps in the fight against money laundering but it would be necessary for the administration not to be complacent. Modalities keep changing and offenders and terrorists exploit different channels to raise money for planning and carrying out crimes in support of their cause.
The fight against terrorism financing and money laundering requires an expanding and consistent effort with regard to prevention, detection and prosecution of offences. Only then can financial systems and national security within and beyond the borders be protected.
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