International consultant, KPMG has estimated that money laundering flows into India are reported to be in excess of $1 trillion every year by drug dealers, arms traffickers and other criminals. Recent years have seen rapid changes in the financial services industry and growing regulatory expectations and pressures. Combating money laundering and terrorist financing continues to be a major challenge for the banking sector, as gatekeepers to the legitimate financial system. However, the responsibility for stemming money laundering activities are also shared by other financial institutions like insurance companies, brokerage houses etc, said KPMG.
Regulatory analysis of money laundering risks and anti-money launderinjg laws (AML) measures in India appear to be still at a nascent stage. However, based on a Global AML Survey conducted by KPMG at the end of 2007, it became apparent that the emerging economies, including India, were investing in tightening the money laundering regulations in India.
The recent vote of confidence that was conducted in the Indian Parliament exposed some red flags around money laundering. A few politicians threw a large sum of cash in the parliament and alleged that there was an attempt to bribe them for their vote. However, this confirms the continued existence of a parallel banking system popularly called ?Hawala?. According to Indian observers, fund transferred through the hawala market are equal to between 30 to 40% of the formal market. The RBI estimated that remittances to India amounted to $28.2 billion.
In the 2008 INCSR report it was stated that India?s emerging status as a regional financial centre, its large system of informal cross border money flows and its widely perceived tax avoidance problems all contribute to the country?s vulnerability to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (diamonds), smuggling, trafficking in persons, corruption, and income tax evasion…India continues to be a drug-transit country.?
In light of both, increased financial activity in India as well as the aspirations of Indian financial institutions looking to go overseas, planned AML activities become an extremely important ingredient to conduct business.
For India, to reduce informal money transfer channels, it needs to strengthen enforcement around the key areas as it relates to financial institutions.
Some key areas of focus include, role of senior management in AML issues, policies and procedures, formal monitoring of AML systems and controls, taking a risk-based approach to KYC activity, politically exposed persons, transaction monitoring, training, attitudes towards regulation and sanctions compliance.
As more and more banks open branches in the US and other countries, they will be exposed to harsher and stricter regulations around money laundering.
In India the AML thrust is driven by the Reserve Bank of India (RBI) and the financial intelligence unit (FIU).
The Prevention of Money Laundering Act 2002 (PMLA), which took effect in July 2005, criminalised money laundering, imposed severe penalties for money laundering offenses, and established regulatory systems for AML monitoring and enforcement across susceptible businesses.
