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GS Paper: Money-Laundering & Its Prevention

  • Virtual Digital Assets Regulation: India’s progressive Approach

    Central Idea

    • The regulation of new technologies can be a challenging task, as their rapid and constant change can create unintended consequences. History is full of examples where innovations were curtailed, such as the infamous Red Flag Act of the UK that ended up strengthening the motorcar industry in Europe. Today, India’s recent notification on anti-money laundering provisions for virtual digital assets businesses and service providers is a step in the right direction.

    What is mean by Virtual Digital Assets?

    • Digital representations of value: Virtual Digital Assets refer to digital representations of value that can be transferred, stored, or traded electronically. These assets may include cryptocurrencies, tokens, or other forms of digital assets that are secured using cryptography and blockchain technology.
    • Intangible: Virtual digital assets are intangible and exist only in the digital realm, but they can be used as a medium of exchange, store of value, or investment.
    • Decentralized nature: Virtual digital assets are typically decentralized and operate independently of central authorities, making them appealing to many users. However, their decentralized nature also makes them susceptible to illicit activities such as money laundering and terrorism financing, which has led to the need for regulations and oversight.

    How Virtual digital assets are linked with money laundering?

    • Anonymity: Virtual digital assets offer a degree of anonymity, which can be exploited by criminals to conceal their identities and activities.
    • Lack of regulations: The lack of comprehensive regulations in the virtual digital asset space makes it easier for criminals to launder money using these assets.
    • Cross-border transactions: Virtual digital assets can be used to conduct cross-border transactions with ease, making it easier for criminals to move money across jurisdictions and avoid detection.
    • Decentralized nature: The decentralized nature of virtual digital assets means that there is no central authority regulating the transactions, making it difficult to track and monitor illicit activities.
    • High liquidity: Virtual digital assets are highly liquid and can be easily converted into other forms of currency, making it easier for criminals to move money around and launder their proceeds.
    • Complex transactions: Some virtual digital asset transactions can be highly complex, making it difficult to trace the source of the funds and detect money laundering activities.

    India’s approach to regulate virtual digital assets

    • Prevention of Money Laundering Act (PMLA) Act of 2002: PMLA enacted in 2002 to prevent and combat money laundering and related crimes. The act provides for the confiscation of property derived from, or involved in, money laundering, and also imposes penalties on individuals and entities involved in money laundering activities.
    • Extension of anti-money laundering provisions: India’s Union Finance Ministry, in a gazette notification, extended anti-money laundering provisions to virtual digital assets businesses and service providers, under the Prevention of Money Laundering Act (PMLA) Act of 2002.
    • Mandatory registration: Virtual digital assets platforms carrying out activities such as exchange between virtual digital assets and fiat currencies, exchange between one or more forms of virtual digital assets, transfer of virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets, and participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset, must register as a reporting entity with the Financial Intelligence Unit-India.
    • Implementation of know your customer and record-keeping measures: Reporting entity platforms such as CoinSwitch are now mandated to implement know your customer, record and monitor all transactions, and report to the Financial Intelligence Unit-India as and when any suspicious activity is detected.
    • Standardisation of norms: By extending anti-money laundering provisions to virtual digital assets, a framework has been created for virtual digital assets platforms to diligently monitor and take actions against malpractices, making the Indian virtual digital assets sector more transparent.
    • Compliance with global guidelines: The anti-money laundering provisions in India are in line with global guidelines put forward by the International Monetary Fund and the Financial Action Task Force.
    • Reconsideration of tax rates: With the mitigation of money laundering and terror financing risks through the PMLA notification, there is an opportunity for India to reconsider its tax treatment of virtual digital assets, which is currently an outlier both domestically and internationally.

    How India can leverage G20 presidency?

    • Spearheading critical discussions on establishing a global regulatory framework for virtual digital assets.
    • Sharing its leadership and experience on this issue with other G20 nations.
    • Considering the steps taken by other G20 nations, such as Japan and South Korea’s establishment of a framework to license Virtual Asset Service Providers (VASPs), and Europe’s passing of the Markets in Crypto-Assets (MiCA) regulation by the European Parliament.
    • Using the G20 platform to coordinate and provide greater oversight on the domestic virtual digital assets ecosystem, which could provide much-needed assurance to everyday users as well as regulators.

    Conclusion

    • India’s measured approach to regulating virtual digital assets is a step in the right direction. With India’s presidency of the G-20, it is an opportunity to establish a global regulatory framework for virtual digital assets. A progressive regulatory framework will establish India’s virtual digital assets leadership and instill the animal spirit in India’s innovation economy.

    Mains Question

    Q. What do you understand by mean by Virtual Digital Assets? Establish a link between virtual digital assets and money laundering. Discuss how India is taking measures to regulate virtual assets?

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  • Government amends KYC to add non-profit organisations, ‘politically exposed persons’

    political

    Central idea: The Finance Ministry has amended the Prevention of Money Laundering (Maintenance of Records) Rules for widening the scope of Know your Customer (KYC) norms to include Politically Exposed Persons (PEPs), non-profit organisations (NPOs) and those dealing in virtual digital assets (VDA) as reporting entities.

    Who are Politically Exposed Persons (PEP)?

    • According to the modified PML Rules, the Finance Ministry has defined PEPs as-
    1. Individuals who have been entrusted with prominent public functions by a foreign country
    2. Includes heads of states or governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations, and important political party officials.
    • Banks and financial institutions must maintain records of financial transactions of PEPs and share them with the Enforcement Directorate as and when sought.

    Other key changes introduced

    Recording of financial transactions of NPOs/NGOs

    • The financial institutions must register the details of their NGO clients on the Darpan portal of the Niti Aayog.
    • They are required to maintain the record for five years after the business relationship between a client and a reporting entity has ended or the account has been closed, whichever is later.

    Tightening of the definition of beneficial owners

    • The amendment to the PMLA rules includes the tightening of the definition of beneficial owners under the anti-money laundering law.
    • As per the amendments, any individual or group holding 10 per cent ownership in the client of a ‘reporting entity’ will now be considered a beneficial owner against the ownership threshold of 25 per cent applicable earlier.
    • The reporting entities include banks and financial institutions, firms engaged in real estate and jewellery sectors, intermediaries in casinos and crypto or virtual digital assets.

    Collection of information from clients

    • Reporting entities such as banks and crypto platforms are mandated to collect information from their clients under the anti-money laundering law.
    • So far, these entities were required to maintain KYC details or records of documents evidencing the identity of their clients, as well as account files and business correspondence relating to clients.
    • They will now have to also collect the details of the registered office address and principal place of business of their clients.
    • Additionally, they are required to maintain a record of all transactions, including the record of all cash transactions of more than Rs 10 lakh.

    Why such move?

    • FATF assessment: The amendments assume significance ahead of India’s proposed FATF assessment, which is expected to be undertaken later this year.
    • Risk-management: In one of its 40 recommendations, FATF recommends that financial institutions have risk-management systems to identify domestic and international PEPs.
    • Remove ambiguities: The broader objective is to bring in legal uniformity and remove ambiguities before the FATF assessment.

     

     

  • Money Laundering laws will now cover Cryptocurrency Trade

    crypto

    The government has imposed the Prevention of Money-laundering Act, 2002 on cryptocurrencies or virtual assets as it looks to tighten oversight of digital assets.

    Central idea: The Prevention of Money-laundering Act, 2002, now covers various financial activities related to virtual digital assets, including exchanges between fiat currencies and digital assets, transfer and storage of digital assets, and provision of financial services related to the sale of digital assets by an issuer.

    What are Cryptocurrencies?

    • Cryptocurrencies are digital or virtual currencies that use encryption techniques to secure and verify transactions and control the creation of new units.
    • They operate independently of central banks and financial institutions and use a decentralized ledger technology called blockchain to record transactions.
    • They can be used to make purchases, transfer funds, or as a store of value, and some are designed to facilitate specific use cases, such as smart contracts.
    • Bitcoin is the first and most well-known cryptocurrency, but there are thousands of others, including Ethereum, Ripple, and Litecoin.
    • Cryptocurrencies can be purchased on cryptocurrency exchanges or obtained through mining, a process in which computers solve complex mathematical problems to validate transactions and earn new cryptocurrency units as a reward.

    Why regulate cryptocurrencies?

    • Consumer protection: Cryptocurrencies are highly volatile and can be subject to fraud, scams, and other forms of financial crime.
    • Preventing money laundering and terrorist financing: Cryptocurrencies can be used to anonymously transfer funds, making them potentially attractive to criminals and terrorists.
    • Systemic risk: Cryptocurrencies are not currently part of the traditional financial system, but they could potentially have an impact on it if they were to become more widely adopted.
    • Taxation: Cryptocurrencies can be used to evade taxes or hide assets. Regulation can help ensure that cryptocurrency transactions are properly taxed and that tax evasion is prevented.
    • Market stability: being highly volatile, regulation can help promote market stability and prevent excessive speculation or manipulation of cryptocurrency markets.

    What is the recent move?

    • Indian crypto exchanges will have to report suspicious activity to the Financial Intelligence Unit India (FIU-IND).
    • The move is in line with the global trend of requiring digital-asset platforms to follow anti-money laundering standards similar to those followed by other regulated entities like banks or stock brokers.

    Recent regulatory moves

    • In the Budget for 2022-23, finance ministry had brought a 30% tax on income from transactions in such assets.
    • Also, to bring such assets under the tax net, it introduced a 1% TDS (tax deducted at source) on transactions in such asset classes above a certain threshold.
    • Gifts in crypto and digital assets were also taxed.

    Back2Basics: Prevention of Money Laundering Act (PMLA)

    • PMLA, 2002 is an Act of the Parliament of India enacted by the NDA government to prevent money laundering and to provide for confiscation of property derived from money laundering.
    • It was enacted in response to India’s global commitment (including the Vienna Convention) to combat the menace of money laundering.
    • PMLA and the Rules notified there under came into force with effect from July 1, 2005.
    • The act was amended in the year 2005, 2009 and 2012.

     

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  • Extradition of Fugitive Economic Offenders (FEOs)

    fugitive

    Central idea: India has called upon G20 countries to adopt multilateral action for faster extradition of fugitive economic offenders (FEOs) and recovery of assets both on the domestic front as well as from abroad.

    Who are Fugitive Economic Offenders (FEOs)?

    • FEOs are individuals who have fled their home country to avoid facing prosecution for financial crimes such as money laundering, fraud, and embezzlement.
    • These individuals typically engage in illegal activities that involve large sums of money and often cause significant damage to the economy of the country they have fled.

    FEOs and India

    fugitive

    • India has put in place specialized legislation in this regard, in the form of the Fugitive Economic Offenders Act, 2018.
    • It defines the term- as an individual against whom a warrant of arrest in relation to a scheduled offense has been issued by any court in India and who has left the country so as to avoid criminal prosecution; or the FEO abroad, refuses to return to face criminal prosecution”.

    Why do offenders go fugitive?

    • Finding safe heavens: FEOs seek refuge in countries that do not have an extradition treaty with their home country or that have weak extradition laws.
    • Evading justice: FEOs often exploit legal loopholes and the differences in laws and regulations across countries to evade justice.
    • Asset offshoring: They may move their assets to offshore accounts or invest in assets such as real estate and art that are difficult to seize.

    How FEOs impact the economy?

    FEOs can have a significant impact on the economy of the country they have fled from.

    • Loan defaults: They may default on loans, engage in fraudulent activities, and siphon off large amounts of money from banks and financial institutions.
    • NPA crisis: This can lead to a rise in non-performing assets (NPAs), a slowdown in economic growth, and a loss of investor confidence.

    International mechanisms for FEOs

    Some of the key international mechanisms for FEOs are:

    • Extradition treaties: Many countries have extradition treaties in place with other countries that enable them to request the extradition of individuals who have fled to other countries to avoid prosecution.
    • Mutual Legal Assistance Treaties (MLATs): MLATs are agreements between countries that facilitate the exchange of information and evidence in criminal investigations and proceedings.
    • International Conventions and Agreements: There are several international conventions and agreements that address financial crimes and provide a framework for international cooperation. Ex. UN Convention against Corruption, FATF etc.
    • INTERPOL: Interpol facilitates cross-border police cooperation and coordination. It maintains a database of wanted individuals, including FEOs, and works with member countries to locate and apprehend them.
    • Asset recovery: Such mechanisms are designed to enable countries to recover assets by means of seizure and repatriation of assets, as well as the freezing of assets to prevent FEOs from accessing them.

    Way forward

    • Strengthening domestic laws: India can strengthen its domestic laws and regulations to make it easier to prosecute FEOs and recover their assets.
    • Developing extradition treaties: India can work to develop and strengthen extradition treaties with other countries to ensure that FEOs are not able to evade justice by fleeing to other countries.
    • Enhancing international cooperation: India can enhance its cooperation with other countries and international organizations to facilitate the sharing of information and intelligence about FEOs.
    • Seizing and repatriating assets: India can work to seize and repatriate assets that have been acquired through illegal means by FEOs.
    • Improving transparency and accountability: India can improve transparency and accountability in its financial system to prevent FEOs from exploiting loopholes and engaging in illegal activities.

     

     

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  • India, Singapore launch UPI-PayNow Linkage

    upi

    India’s Unified Payments Interface (UPI) and Singapore’s PayNow were officially connected to allow a “real-time payment linkage”.

    What are UPI and PayNow?

    [A] Unified Payments Interface (UPI)

    • UPI is India’s mobile-based fast payment system, which facilitates customers to make round-the-clock payments instantly, using a Virtual Payment Address (VPA) created by the customer.
    • It eliminates the risk of sharing bank account details by the remitter.
    • UPI supports both Person-to-Person (P2P) and Person-to-Merchant (P2M) payments and it also enables a user to send or receive money.

    [B] PayNow

    • It is a fast payment system in Singapore.
    • It enables peer-to-peer funds transfer service, available to retail customers through participating banks and Non-Bank Financial Institutions (NFIs) in Singapore.
    • It allows users to send and receive instant funds from one bank or e-wallet account to another in Singapore by using just their mobile number, Singapore National Registration Identity Card (NRIC)/Foreign Identification Number (FIN), or VPA.

    What is the UPI-PayNow linkage?

    • Cross-border retail payments are generally less transparent and more expensive than domestic transactions.
    • The project to link both the fast payment systems was initiated in September 2021 to facilitate faster, more efficient and transparent cross-border transactions relating to trade, travel and remittances between the two countries.

    Significance of the integration

    • Enhanced cross-border transactions: The integration will enable easier cross-border transactions between India and Singapore, reducing the need for intermediaries and associated costs.
    • Easier remittances: The integration will make it easier for Indian workers in Singapore to send money back home to their families.
    • Boost to trade and investment: The integration will facilitate smoother transactions between businesses in the two countries, potentially increasing trade and investment.
    • Strengthening of diplomatic ties: The integration is expected to improve diplomatic ties between India and Singapore.

    How the integration works?

    • The integration is made possible through the use of standardized QR codes.
    • The QR codes will allow users to transfer funds between the two systems in real-time, without the need for intermediaries.

    Implications for the future

    • More integrations: The success of the UPI-PayNow integration could pave the way for similar integrations between other countries.
    • Increased use of digital payments: The integration is expected to encourage the adoption of digital payments in both India and Singapore, potentially reducing the use of cash.

     

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  • Income Tax Dept. surveys BBC over Transfer Pricing allegations

    tax

    Central idea: The Income Tax Department has conducted surveys at the premises of the British Broadcasting Corporation (BBC) in Delhi and Mumbai. The BBC has been deliberately violative of transfer pricing rules.

    Transfer Pricing: A Tax Evasion Technique

    • Transfer pricing refers to the practice of determining the price at which goods, services or intangible property are sold between related entities within an enterprise across international borders.
    • It is a practice of multinational companies transferring profits to low-tax jurisdictions to reduce their tax liabilities.

    How does Transfer Pricing work?

    • The I-T Department gives the following example: “Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in theopen market for 400 rupees.
    • Had A sold it (the good) direct, it would have made a profit of 300 rupees.
    • But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance.
    • The transaction between A and B is arranged and not governed by market forces.
    • The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).

     

    What is a ‘Survey’ under the I-T Act?

    • Section 133A of the Income Tax Act, 1961 empowers the Income Tax Department to conduct surveys to collect hidden information.
    • I-T authority can enter any place of business or profession within their jurisdiction, verify books of account, and impound documents if needed.

    What is an I-T search?

    • Section 132 of the Income Tax Act, which I-T Department to conduct searches when it has reasons to believe that someone is in possession of undisclosed income or property.

    Differences between a survey and a search

    • A survey is a less serious proceeding than a search and can only be conducted during working hours on business days within the limits of the area assigned to the officer.
    • In contrast, a search can happen on any day after sunrise, and the entire premises can be inspected to unravel undisclosed assets, with the help of police.
    • While the scope of a survey is limited to the inspection of books and verification of cash and inventory, in a search, the entire premises can be inspected to unravel undisclosed assets, with the help of police.

    Powers of the I-T authority during a search

    • The provisions for impounding or seizing the goods were introduced only by the Finance Act, 2002.
    • The Act says that during a search, an authorized officer can:
    1. Enter and search any building or place where he has reason to suspect that such books of account, other documents, money, bullion, jewellery, or other valuable article or thing are kept;
    2. Break/open the lock of any door, box, locker, safe, almirah, or other receptacles for exercising the powers conferred by clause (i) where the keys thereof are not available;
    3. Seize any such books of account, other documents, money, bullion, jewellery, or other valuable article or thing found as a result of such search;
    4. Place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom;
    5. Make a note or an inventory of any such money, bullion, jewellery, or other valuable article or thing.

    What are Transfer pricing rules?

    • By setting transfer pricing rules, countries can ensure that companies pay taxes on profits generated within their jurisdiction.
    • Transfer pricing rules are used to determine the “arm’s length price” at which transactions between related entities should take place.
    • The arm’s length price is the price that would have been charged between unrelated entities in similar circumstances.
    • The rules aim to ensure that related entities do not shift profits to low-tax jurisdictions, and that the tax authorities of different countries get their fair share of taxes.

    What is the role of tax authorities in curbing transfer pricing?

    • Audit: The tax authorities can carry out transfer pricing audits to determine whether the prices used in transactions between related entities are in accordance with the arm’s length principle.
    • Compliance of Arm’s length principle: If the tax authorities find that the prices are not in accordance with the arm’s length principle, they can make adjustments to the prices and levy taxes accordingly.

    What is the “Arm’s Length Arrangement” that the BBC has allegedly violated?

    • Section 92F(ii) of the Income Tax Act, 1961 defines arm’s length price as “a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”.
    • Section 92C(1) says arm’s length shall be determined by the “most appropriate” among the following methods:
    • comparable uncontrolled price method;
    • resale price method;
    • cost plus method;
    • profit split method;
    • transactional net margin method;
    • such other method as may be prescribed by the I-T Board.

    What lies ahead for BBC?

    • BBC will have to comply with transfer pricing rules in each country in which they operate.
    • Failure to comply with transfer pricing rules can lead to tax liabilities and penalties.
    • Compliance with transfer pricing rules can be complex and require the assistance of tax experts.

    Try this MCQ:

    Q. Which government agency regulates transfer pricing rules in India?

    A) Reserve Bank of India

    B) Securities and Exchange Board of India

    C) Income Tax Department

    D) Ministry of Corporate Affairs

     

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  • Virtual Digital Assets (VDA) and Terror Financing

    Digital

    Context

    • No Money for Terror conference hosted by the Union Ministry of Home Affairs concluded with a commitment from the 93 participating nations to end all financing of terror, including through the use of emerging digital technologies such as VDAs.

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    Concerns regarding virtual digital assets

    • VDAs for illicit activities: The concerns around the misuse of VDAs for illicit activities require careful legislative responses and forward-looking regulatory guardrails.
    • Non reporting and non-transparency: On a fundamental level, these concerns stem from a lack of reporting and transparency norms, and an absence of international consensus on regulatory design.
    • Lack of reliable data: The Reserve Bank of India’s (RBI) Deputy Director highlighted the difficulty in regulating VDAs, given the lack of reliable data on VDA transactions.
    • Unregulated transactions: This allows bad actors to engage in unchecked transactions and defraud investors, as evinced by one of the (erstwhile) largest VDA exchanges FTX.

    Digital

    India’s role in regulating the VDA

    • Leveraging G20 Presidency: As one of the highest-ranked countries in terms of VDA adoption, and now with the G20 presidency, India has a critical role to play in shaping the global regulatory environment.
    • Empowering anti-money laundering authorities: In the short term, a viable approach for India is in taking the industry and the investor into confidence by allowing anti-money laundering (AML) authorities visibility over VDA transactions, and the power to impose controls upon them and prosecute in the event of any misuse.
    • India should adopt FATF guidelines: There are several international templates to this effect. The Financial Action Task Force Guidelines on Virtual Asset Transactions (FATF Guidelines) are a case in point, which have been adopted by various jurisdictions, including the EU, Japan and Singapore.

    Digital

    FATFs Guideline regarding VDA regulation

    • Minimum anti-money laundering standards: The FATF prescribes minimum Anti-money laundering standards that countries should employ to prevent the likelihood of misuse, and the FATF Guidelines prescribe the same for VDA transactions.
    • Licensing and reporting of VDAs: The Guidelines are applicable to VDA service providers of member states like India. Key features of the FATF Guidelines include licence/registration requirements and extensive reporting and record-keeping obligations for VDA service providers.
    • Travel rule obligations: One such obligation is the Travel Rule, which requires service providers to record the originator and beneficiary’s account details, transaction amount, and purpose of transaction for all wire transfers.
    • Verifying identity above certain threshold: Customer due diligence obligations, which include verifying the customer and beneficiary’s identities should be conducted for all transactions exceeding $1,000.
    • Obligation on service provider: The FATF Guidelines also require VDA service providers to perform enhanced due diligence obligations (such as corroborating the customer’s identity with a national database or potentially tracing the customer’s IP address to ensure there are no links to illicit activities) when a transaction is with a higher-risk country.

    Digital

    What are India’s current laws to regulate VDA?

    • PMLA includes reporting obligation: India’s existing Anti-money laundering framework under the Prevention of Money Laundering Act, 2002 (PMLA) already applies these regulatory tools over traditional financial institutions. Notably, the PMLA also includes reporting obligations for overseas transactions that fall under the ambit of “suspicious transactions” under the framework.
    • PMLA doesn’t apply to VDAs: Currently, the PMLA does not apply to the VDA industry.
    • government can bring VDA under PMLA: The government has the power to notify any “designated business or profession” as a reporting entity under the PMLA and can issue a notification that classifies VDA service providers as a designated business.

    Conclusion

    • With the Digital Data Protection Bill and the Digital India Act already in the pipeline, Indians and digital businesses will soon have a coherent rights and responsibility framework to operate within. The time is ripe to extend regulatory oversight over the VDA industry so as to ensure that tech-innovation flourishes in a responsible, accountable manner.

    Mains Question

    Q. How virtual digital assets and terror financing are interlinked? What is the role of PMLA act in regulation of VDA in India?

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  • India to host ‘No Money for Terror’ Conference

    The Ministry of Home Affairs will be organising the Third Ministerial ‘No Money for Terror’ Conference next week where participants from around 75 countries are expected to attend.

    ‘No Money for Terror’ Conference

    • The conference that was first held In Paris in 2018, followed by Melbourne in 2019.
    • It will be held in Delhi after gap of two years due to the travel restrictions imposed due to the COVID-19 pandemic.

    Objectives of the event

    • India’s efforts: The event conveys India’s determination in its fight against terrorism as well as its support systems for achieving success against it.
    • Global cooperation: It also intends to include discussions on technical, legal, regulatory and cooperation aspects of all facets of terrorism financing.
    • Compliance mechanism: The involvement of a compliant State often exacerbates terrorism, especially its financing.

    What is Terror Financing?

    • Terrorist financing encompasses the means and methods used by terrorist organizations to finance their activities.
    • This money can come from legitimate sources, for example from profits from businesses and charitable organizations.
    • But terrorist groups can also get their financing from illegal activities such as trafficking in weapons, drugs or people, or kidnapping for ransom.
    • Nations like Pakistan has stated policy of supporting cross-border terrorism in India through global fundings.

    Why need consensus over terror-finance prevention?

    • Globally, countries have been affected by terrorism and militancy for several years and the pattern of violence differs in most theatres.
    • It is largely impacted by tumultuous geo-political environment, coupled with prolonged armed sectarian conflicts.
    • Such conflicts often lead to poor governance, political instability, economic deprivation and large ungoverned spaces.

    Other mechanisms to curb terror financing: FATF

    • FATF is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering.
    • It makes recommendations for combating financial crime, reviews members’ policies and procedures, and seeks to increase acceptance of anti-money laundering regulations across the globe.

    What hinders the global consensus?

    • No definition of terrorism: There is no universal agreement over what constitutes terrorism. This weakens efforts to formulate a concerted global response.
    • Non-enforcement: Multilateral action suffers from inadequate compliance and enforcement of existing instruments.
    • No global watchdog: Counter-terrorism regime lacks a central global body dedicated to terrorist prevention and response.

    Way forward

    • No country if safe if terrorism persists anywhere across the world.
    • The world must resolve to make the international financial system entirely hostile to terrorist financing.
    • Concerted efforts and a comprehensive approach should be adopted to counter terrorism under the UN auspices on a firm international legal basis.

     

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  • FATF, Fighting the Terrorism or Just Another Diplomatic Arena

    FATF

    Context

    • On October 21, the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, announced the removal of Pakistan from its Grey List. The announcement was expected.

    What is FATF?

    • Inter-governmental organization: The FATF, a 39-member inter-governmental organization with its headquarters in Paris, was set up in 1989 by the Group of Seven (G7) countries with the aim of setting global standards for countering the menace of money laundering.
    • Terror financing included under FATF mandate: Following the terror attacks on September 11, 2001, the objective of countering the financing of terrorism was added to the FATF’s mandate. Later, its objectives were further expanded to counter the financing of proliferation of weapons of mass destruction.

    FATF

    How FATF functions?

    • Three level mandate: The FATF seeks to fulfil its three-pronged mandate by drawing up a list of guidelines. Known as the FATF Recommendations or FATF Standards, these are meant to ensure a coordinated global response to prevent.
    1. organized crime,
    2. corruption and
    3. Terrorism
    • Domestic plus international regulatory measures: They encompass a range of domestic legislative, regulatory and enforcement actions, as well as international cooperation measures, that states are expected to adopt and implement.
    • Consensus based decision: The FATF and its associate, or regional, members such as the Asia Pacific Group on Money Laundering (APG) take their decisions on the basis of consensus. More than 200 countries and jurisdictions are committed to implementing the FATF’s recommendations.

    FATF

    What is grey listing and black listing?

    • Monitoring the adherence to recommendations: The FATF monitors adherence to its recommendations by periodic evaluations of the anti-money laundering (AML), combating financing of terrorism (CFT) and proliferation financing (PF) regimes of member countries and jurisdictions which voluntarily submit to its monitoring.
    • Strategic deficiencies by countries: Countries which exhibit strategic deficiencies in their AML/CFT/PF regimes are placed under a scheme of “increased monitoring” informally known as Grey Listing.
    • Action plan to address the deficiencies: States placed under the Grey List are expected to swiftly put in place the requisite measures to address their deficiencies on the basis of Action Plans drawn up and evaluated through a process of consultation with the FATF.
    • Serious strategic deficiency: States that exhibit serious strategic deficiencies in their AML/CFT/ PF regimes are placed under a Black List formally known as High-Risk Jurisdictions subject to a Call for Action.
    • Serious economic consequences may follow: While Grey Listing amounts to a warning, Black Listing entails serious economic consequences by making it incumbent on governments, international lenders and commercial entities to conduct enhanced due diligence checks while transacting business with the designated countries and, in extreme cases, apply “counter-measures” against offenders.

    Present status of listing by FATF?

    • Grey listing: Following the removal of Pakistan, there are 23 countries on the FATF’s Grey List.
    • Black listing: There are only three countries on the Black List, North Korea, Iran and Myanmar. These listing processes of the FATF are driven predominantly by the pulls and pressures of international power politics and not merely by technical parameters.

    How Pakistan has been grilled by FATF for Terror financing?

    • In 2008 Pakistan removed from listing: Pakistan has been placed in and removed from the Grey List in the past too. The first time was from February, 2008 to June, 2010, when it was removed from the list after it supposedly demonstrated progress in improving its AML/AFT regime.
    • Mumbai terror attack and grey list: The terrorist attacks in Mumbai on November 26, 2008 took place while Pakistan was on the Grey List for the first time. The second time was from February, 2012 to February, 2015, by the end of which period it had supposedly made significant progress in improving its AML/CFT regime.
    • Osama bin laden killing: The elimination of Osama bin Laden in the American raid on Abbottabad on May 2, 2011 took place after Pakistan’s exit from the Grey List for the first time and before its placement on the list for the second time.
    • From 2018-2022: Pakistan was placed in the Grey List for the third time in June, 2018 and remained there till October, 2022. During this period, it was compelled to put in place several legislative, administrative and regulatory measures to improve its compliance with international AML/CFT standards.
    • Action against individual and organisations: In recent years, there has been increasing realisation among FATF members that it is the effectiveness of action taken against individuals and entities of concern rather than pro-forma technical compliance” that should form the basis of judging the extent of adherence to FATF standards.
    • Conviction of hafiz Saeed: It is this more realistic approach coupled with the implicit threat of being moved from the Grey List to the Black List that finally compelled Pakistan to prosecute, convict, fine and jail, on terrorism financing charges, Lashkar-e-Tayyaba (LeT) Amir, Hafiz Muhammad Saeed, LeT’s chief operational commander, Zakiur Rehman Lakhvi and Sajid Majeed aka Sajid Mir, “operational manager” of the 26/11 Mumbai attacks, after having pronounced him missing and dead.
    • Jaish-e-Mohammed: A disingenuous attempt by Pakistan to persuade a visiting FATF verification team in August-September 2022 that Jaish-e-Mohammed (JeM) Amir, Maulana Masood Azhar, had escaped to Afghanistan was strongly countered by a spokesman of the Afghan Taliban.

    How Pakistan manages pressure form FATF?

    • with the support of USA: It is well known that much of the diplomatic heavy lifting to place Pakistan in the Grey List in June 2018 and keep it on the list for an extended period of time was done by the US. There had been a feeling among those following developments at the FATF that American pressure on Pakistan would continue till such time as the US needed Pakistan to bring the Afghan Taliban to the negotiating table and once the US withdrawal from Afghanistan was completed, the pressure on Pakistan would ease. Subsequent developments have validated this assessment.
    • Help of China and turkey: Although the threat of being moved from the Grey List to the Blacklist remained hanging over Pakistan’s head, this was never a realistic possibility, considering the likely opposition to any such move by Pakistan’s staunch friends in the FATF, such as China, Malaysia, Turkey and Saudi Arabia

    FATF

    Conclusion

    • India will have to continue mustering all available instruments and options to deny Pakistan operating space to wield the jihadi weapon, till such time as there is convincing evidence of a consensus among the generals in Rawalpindi that the weapon has outlived its utility and needs to be renounced once and for all.

    Mains Question

    How FATF is useful international forum for fight against terrorism? How was Pakistan forced by FATF to take actions against mastermind of 26/11 attack?

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  • What is FCRA and its recent amendments?

    Recently, the Ministry of Home Affairs amended certain provisions of the Foreign Contribution (Regulation) Act (FCRA).

    • The Ministry had made the FCRA rules tougher in November 2020, making it clear that NGOs (Non-Government Organizations) which may not be directly linked to a political party but engage in political action like bandhs, strike or road blockades will be considered of political nature if they participate in active politics or party politics. According to the law, all NGOs receiving funds have to registered under the FCRA.
    • The move comes after the government enhanced the import duty on gold import from 7.5 % to 12.5 % in a bid to discourage import of gold that leads to increase in trade deficit and puts pressure on the currency and forex reserves.
      • An increase in import duty on gold will lead to increase in cost of import and discourage its import and consumption.

    What is the FCRA?

    • About:
      • The FCRA was enacted during the Emergency in 1976 in an atmosphere of apprehension that foreign powers were interfering in India’s affairs by pumping in funds through independent organisations.
        • These concerns had been expressed in Parliament as early as in 1969.
      • The law sought to regulate foreign donations to individuals and associations so that they functioned “in a manner consistent with the values of a sovereign democratic republic”.
    • Objectives:
      • It requires every person or NGO wishing to receive foreign donations to be registered under the Act, to open a bank account for the receipt of the foreign funds and to utilise those funds only for the purpose for which they have been received and as stipulated in the Act.
      • The Act prohibits receipt of foreign funds by candidates for elections, journalists or newspaper and media broadcast companies, judges and government servants, members of legislature and political parties or their office-bearers, and organisations of a political nature.
    • Amendments:
      • It was amended in 2010 to “consolidate the law” on utilisation of foreign funds, and “to prohibit” their use for “any activities detrimental to national interest”
      • The law was amended again by the current government in 2020, giving the government tighter control and scrutiny over the receipt and utilisation of foreign funds by NGOs.

    What are the Key Changes?

    • It allows Indians to receive up to Rs 10 lakh annually from their relatives abroad under FCRA.
      • The limit earlier was Rs 1 lakh.
      • If the amount exceeds, the individuals will now have 90 days to inform the government instead of 30 days earlier.
    • It has given individuals and organisations or NGOs 45 days for the application of obtaining ‘registration’ or ‘prior permission‘ under the FCRA to receive funds.
      • Earlier it was 30 days.
    • Organisations receiving foreign funds will not be able to use more than 20 % of such funds for administrative purposes.
      • This limit was 50 % before 2020.
    • Made five more offences under the FCRA “compoundable”, making 12, instead of directly prosecuting the organisations or individuals.
      • Earlier, only seven offences under the FCRA were compoundable.

    What are Compoundable Offences?

    • Compoundable offences are those offences where, the complainant (one who has filed the case, i.e., the victim), enter into a compromise, and agrees to have the charges dropped against the accused. However, such a compromise should be a “Bonafide,” and not for any consideration to which the complainant is not entitled to.
    • The FCRA violations which have become compoundable now include failure to intimate about receipt of foreign funds, opening of bank accounts, failure to place information on website, etc.

    What is the Significance of the Move?

    • Enhances Remittances:
      • It will curb the outflow of funds and on the other hand enhancing inward Remittances.
    • Stabilise forex Reserves:
      • It will lead to an increase in inflow of funds into India which will stabilise the forex reserves and also the currency.
      • Similarly, an increase in import duty on gold from 7.5 % to 12.5 % will discourage gold import as it will result in an increase in the price of gold in India.
    • Reduces Trade Deficit:
      • An increase in inflow of funds and reduction in outflow of funds on account of gold imports will help reduce the trade deficit.
        • The trade deficit in the month of April and May 2022 stood at a high of USD 20.1 billion and USD 24.6 billion respectively making an aggregate of USD 44.7 billion in two months.
        • By comparison the trade deficit in April and May 2021 stood at USD 21.8 billion.