Key insights from India’s Mutual Evaluation Report (MER) 2024
Overview
India’s 2024 Mutual Evaluation Report (MER) offers a detailed look at the country’s approach to tackling money laundering (AML) and terrorism financing (CFT). We’ll break down the key points from the report, focusing on compliance, risk-based supervision, and areas where improvements are needed.
Priority actions
PEP identification & enhanced measures
The Mutual Evaluation Report suggests that there are some gaps in how India handles domestic politically exposed persons (PEPs), so authorities need to address those compliance issues.
Regulatory bodies like the RBI, IRDAI, and IFSCA should also take a closer look at PEPs and how well sanctions are being followed.
Building capacity for DNFBP supervisors
Supervisors for designated non-financial businesses and professions (DNFBPs) need more support to manage AML/CFT risks effectively.
India’s Mutual Evaluation Report highlights a need to get better at spotting suspicious transactions and increasing the number of suspicious transaction reports (STRs), especially in sectors with higher risks.
The introduction of the Online Risk Based Supervision (ORBS) system should help DNFBP supervisors manage their duties from licensing all the way through to supervision.
Supervisory & sectoral insights
Accountants and lawyers
These professionals are currently supervised by bodies like the Institute of Chartered Accountants of India (ICAI) and State Bar Associations.
However, these self-regulatory bodies (SRBs) need to improve their understanding of the risks involved in money laundering and terrorist financing. They also need to take more proactive, risk-based actions in their supervision.
Trust and company service providers (TCSPs)
Company secretaries are regulated by the Institute of Company Secretaries of India (ICSI), but those who don’t fall under this category still need to be identified and supervised when it comes to AML/CFT.
RBI’s risk-based supervision
The RBI has a data-driven approach, collecting around 750 data points from 90 banks every quarter to inform its risk models.
They develop about 450 risk indicators each year to help score financial institutions and flag any outliers, such as banks that report unusual numbers of high-risk clients.
Banks get ongoing feedback through off-site monitoring and annual on-site inspections, so the process is continuous.
Risk-based supervision elements for supervisory bodies
Granular risk understanding: Supervisors need to deepen their understanding of sector-specific money laundering and terrorism financing risks, especially in fields like accounting, law, and TCSPs.
Capacity building: Supervisors across sectors, especially in DNFBPs, need better training and resources to enforce compliance.
Data-driven risk indicators: It’s important to use data analytics to update risk indicators regularly to reflect new threats.
Thematic reviews & inspections: Supervisors should carry out specific reviews focused on particular risks and adjust inspection cycles accordingly.
Collaborative outreach: Collaboration between supervisors and the Financial Intelligence Unit (FIU) is key to raising awareness about compliance.
Dynamic monitoring: A more flexible approach to monitoring would allow for faster reactions based on real-time data.
Key extracts
PEP priority actions
Enhanced due diligence: Financial institutions and DNFBPs need to step up their checks on PEPs, gathering more details on where their funds and wealth come from.
Training & guidance: Regular training for compliance staff can help them better spot and manage risks related to PEPs.
Monitoring: Systems should be in place to track PEP transactions and identify any suspicious activity.
Reporting compliance: Financial institutions and DNFBPs must stick to their reporting obligations, especially when it comes to suspicious transactions involving PEPs.
Real estate supervision
The Central Board of Indirect Taxes and Customs (CBIC), which oversees real estate agents, has a solid grasp of the broader risks in the real estate sector, but there’s less understanding at the individual firm level.
Inspections cover compliance with AML/CFT rules, such as having a principal officer, keeping customer records, and running proper training programmes.
However, with only a small number of agents being inspected so far, more attention is needed to fully supervise this sector.
Casino supervision
The small size of the casino sector allows supervisors to closely monitor compliance, even carrying out real-time assessments.
Supervisors check that casinos follow AML/CFT guidelines, including customer due diligence (CDD), transaction monitoring, and reporting obligations for PEPs and TF sanctions.
Supervision of professionals (lawyers, accountants, company secretaries)
Supervisors for these professions were appointed in May 2023, and while supervision is still evolving, the focus is on building their capacity to manage risks effectively.
SRBs like ICAI need to improve their understanding of risks and apply proportionate actions in line with those risks.
Compliance monitoring is still in its early stages, and more work is needed to develop this further.
Financial sector supervision
The RBI keeps a close watch on commercial banks, urban co-operative banks (UCBs), and non-banking financial companies (NBFCs) through regular engagement and inspections.
Larger institutions have annual on-site inspections, and quarterly data submissions help shape their risk profiles.
Thematic Reviews focus on specific issues, such as the use of mule bank accounts and compliance with the Central KYC Registry.
Supervisory maturity levels
Supervision maturity varies across sectors: commercial banks and larger NBFCs/UCBs have more established systems, while sectors like real estate and legal professionals are still catching up.
Risk-based supervision for virtual asset service providers (VASPs) is also just getting started, but progress is being made under the guidance of FIU-IND.
Outreach & guidance
Supervisors and FIU-IND are actively engaging with regulated entities to help them understand their risks and improve their compliance efforts.
FIU-IND has also rolled out red-flag indicators and conducted outreach on typologies like trade-based money laundering (TBML) and cyber fraud.
Conclusion
India’s 2024 Mutual Evaluation Report shows that progress is being made in strengthening the country’s AML/CFT framework, but there are still several areas that need improvement. Key priorities include fixing gaps in PEP identification and building up the capabilities of newly appointed DNFBP supervisors.
While sectors like banking and insurance are already following mature, risk-based models of supervision, others, such as real estate and professional services, still need to catch up. There’s been some good collaboration between supervisory bodies and FIU-IND, which is helping to raise awareness and improve compliance. But more needs to be done, especially in sectors overseen by SRBs like accountants and lawyers.
To fully meet the Financial Action Task Force (FATF) standards, India must keep refining its approach, improving sectoral compliance, and closing gaps in its risk models. Continued focus on these efforts will be essential to effectively combat money laundering and terrorism financing in the long run.