India’s digital stack faces low terror funding risk, watchdog says
The overall vulnerability of these financial products is low as far as they relate to money laundering and terror funding, FATF said.
Reporter: Kaumudi Kashikar Gurjar
India’s initiatives to boost financial inclusion face minimal risks from money laundering and terrorism financing, global watchdog Financial Action Task Force (FATF) said.
The country has taken several steps to promote financial inclusion with the aim to maintain financial integrity, by designing financial inclusion products with in-built risk mitigating measures, the Paris-based watchdog said in a report this week.
Most big transactions in India’s informal economy occur in cash. Recognizing the risks associated with cash transactions, India implemented policies—known as Jan Dhan, Aadhaar, and Mobile (JAM)—to promote the use of the formal financial system.
These policies (or the JAM digital stack) have broadened affordable access to bank accounts and other financial services through a biometric identification system and have supported the development of a digital mobile payment system, the report said.
“The overall vulnerability of these financial products is low as far as they relate to money laundering and terror funding. Therefore, India has put in place simplified measures to allow broader access to the formal financial system,” the report based on a sectoral risk assessment said.
To ensure that people with lower incomes in India have access to banking, the Prevention of Money Laundering Act (PMLA) permits simplified customer due diligence, or CDD, for opening “small accounts,” as defined in its regulations, as well as other accounts for low-risk client categories.
However, these simplified measures are not allowed where there is a suspicion of money laundering or terrorism financing, in specific higher-risk scenarios, or where the identified risk does not align with the national risk assessment, the report said.
India has focused on developing its digital payment infrastructure, leading to a dramatic increase in digital transaction volumes from 20.7 billion in 2017-18 to 134.6 billion in 2022-23. As a result of these initiatives, access to financial services has expanded from 35% of the population in 2011 to 80% in 2017, it added.
The latest update to the FATF’s money laundering guidance was co-led by Mexico and Hong Kong, with contributions from a 33-member team from FATF and FATF-style regional bodies (FSRB), including observers from India.
Money laundering, a complex financial crime, involves hiding the origins of illicit funds to make them seem legitimate, thereby avoiding traceability of “dirty money.”
This term encompasses both the laundering process and the broader criminal activities that produce these funds.