As India wakes up to the threat of 'laundered' money being used by terrorist outfits to finance their operations, it is seeking membership in the Financial Action Task Force. However, this is unlikely to happen before next year, according to a study by global audit and taxation advisor KPMG.
Membership in the FATF, an inter-government body formed to tackle money laundering and terrorist financing, would enable India to get international cooperation in such cases and would change perception of India abroad, said Arpinder Singh, executive director, forensic services, KPMG. Membership would also mean that Indian banks would face fewer regulatory hurdles in setting up of overseas branches.
With slush funds being increasingly used for financing terrorism, Indian financial institutions are planning to increase investment in their anti-money laundering systems, the KPMG survey has found. It said India's financial institutions require more investment and improvement in their anti-money laundering systems.
The survey of India's financial institutions showed that 79 per cent of them had a positive attitude towards the regulations, and believed that the level of burden placed on them was acceptable. ''Though financial institutions in India have covered a large ground in AML (anti-money laundering) compliance, still significant investment and improvement in AML systems is required,'' KPMG said.
"India's escalating global exposure is rendering its financial institutions vulnerable to money laundering. Transaction monitoring and implementation of an automated solution are rated among areas requiring largest investments," KPMG said.
More than 2,000 respondents believed introducing policies and procedures in line with global best practices would be one of the major areas for investment. Though almost 70 percent of the respondents stated they have an effective system for transaction monitoring, it still remained a priority area for investment, according to the survey.
"Rising future cost is largely attributed to transaction look-back reviews, transaction monitoring, introduction of policies and procedures in line with global best practices and automation of account opening procedures," KPMG said. "This demonstrates that significant effort is required in implementing AML compliance programmes, including transaction monitoring."
KPMG noted that the risks of money laundering were not limited to terrorist financing. "If unchecked, money laundering could have a deep impact on the economy of a country with large amounts of unaccounted funds resulting in destablisation of a country's economy."
It said though Indian financial institutions have covered a "large ground" in anti-money laundering compliance, "significant investment and improvement" are still required, as the concept of AML is still developing in India.
For example, though politically exposed persons have been identified as one of the key factors for risk consideration, a large number of respondents (45 per cent) still do not have procedures in place to identify them. Nearly 42 per cent do not have an automated procedure for sanction list monitoring, essential to ensure that such monitoring happens at every stage from account opening to transaction monitoring.
Arpinder Singh said, ''India's escalating global exposure is also rendering its financial institutions vulnerable to money laundering. The ratification of the Prevention of Money Laundering Act in 2005 has made AML an essential compliance for FIs in India. They have to play a pivotal role in addressing the issue by assisting regulators and law enforcement managers to fight this crime.''
He added, ''With India aspiring to become a member of Financial Action Task Force, it is essential that it commits to the implementation of wide ranging requirements of the task force. This should include an independent review of policies and processes.''