THE global financial system is at risk due to money laundering, terrorist financing, and the financing of weapons of mass destruction proliferation. These illegal activities fillip militancy, insurgencies and terrorism, causing destruction and chaos for the accomplishment of vested political agendas of states and non-state actors. The Financial Action Task Force (FATF), an intergovernmental organization, acts as a worldwide watchdog, establishing international rules to avoid such illicit activity. FATF’s Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) frameworks set critical principles for mobilizing political will and a country’s regulatory changes.
The FATF’s capacity to detect flaws in the financial systems of nations under enhanced scrutiny, sometimes known as the “grey list,” enables it to urge governments to rectify strategic inadequacies. Compliance with FATF recommendations is critical for nations under examination, necessitating prompt and comprehensive responses to protect their economies and worldwide reputations. The FATF issued its Mutual Evaluation Report on India in September 2024, citing severe inadequacies in the country’s anti-money laundering (AML) and counter-terrorist financing (CFT) regimes. Following a comprehensive evaluation in June 2024, key issues highlighted include prosecution delays, insufficient oversight of non-profit organizations (NPOs), gaps in the regulation of Politically Exposed Persons (PEPs), and inadequate monitoring of the digital economy and terrorism financing.
The FATF study revealed one of the most alarming findings: inadequate institutional ability to manage and mitigate financial crime risks. While India has made considerable headway in enhancing its AML and counter-terrorism efforts, there are still issues in identifying threats and successfully executing counterterrorism measures. The FATF advised structural improvements, primarily to improve capacity building and ensure more effective prosecution of financial crimes. Delays in prosecuting instances involving money laundering and terror funding are viewed as significant impediments to the efficacy of India’s judicial system in fighting these crimes. The FATF also stressed India’s need to strengthen risk-based supervision, which would enable more focused and effective regulatory action.
The FATF’s assessment is particularly damning concerning insurgency and terrorism financing within India. According to the report, groups such as ISIL, Al-Qaeda, and left-wing extremists have been actively collecting and managing funds within the country. These results are a clear critique of India’s failure to stop the flow of illegal money that supports terrorists, particularly in unstable areas like northern India. In addition, the FATF denounced India for limiting civic space, limiting the right to free speech, and preventing peaceful assembly, citing a concerning pattern of suppressing civil freedoms in the name of national security. Questions are raised concerning India’s general governance in addressing these issues in light of this twin inability to prevent the financing of terrorism and to uphold the balance between security and civil freedoms.
The research also identified loopholes in the regulation of Designated Non-Financial Businesses and Professions (DNFBPs), which are particularly vulnerable to money laundering and terrorist funding. India’s thriving gems and jewellery business, which is frequently tied to the black market, has been identified as a significant source of illegal money flows. The FATF encouraged India to improve controls on cash transactions and the precious stone industry, since both sectors have become breeding grounds for financial crime. Furthermore, the research emphasized the significance of efficient communication between regulatory organizations and law enforcement authorities.
Politically Exposed Persons (PEPs) were also singled out in the report for breaking laws pertaining to beneficial ownership and wealth sources. The FATF urged India to clearly define domestic PEPs under its anti-money laundering laws and implement better risk-based measures to monitor their financial activities. Failure to do so leaves the door open to corruption and manipulation of the financial system for personal or political gain. According to the report, certain non-profit organizations that are registered as charity organizations have been avoiding taxes, which leaves them open to abuse by terrorist organizations looking to use the appearance of generosity to finance their operations. India has to keep a closer eye on NPOs and make sure they aren’t being used improperly to finance terrorism.
The study emphasized that India should reinforce its Customer Due Diligence (CDD) responsibilities, improve its treatment of drug-related charges, and accelerate ongoing money laundering prosecutions. It also mentioned that ISIS’s footprints have alarmingly expanded throughout India since 2014, underscoring the need for India to step up its counterterrorism financing initiatives. There is still a lot of work to be done, even if the FATF has classified India as falling under its “regular follow-up” category and requires progress reports by October 2027. Both local and foreign parties will be keenly observing India’s progress in bringing its AML/CFT system into compliance with international norms.
—The author is an independent researcher who writes on issues concerning national and regional security, focusing on matters having critical impact in these milieus.
