What does India’s Mutual Evaluation Report by the FATF say about DNFBPs?

The Mutual Evaluation Report for India by the Financial Action Task Force (FATF) has lauded India’s efforts at Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT). A joint FATF-Asia Pacific Group on Money Laundering (APG)-Eurasian Group (EAG) assessment of the country’s measures to tackle illicit finance (published on 19th September 2024) concludes that “India has achieved a high-level of technical compliance across the FATF Recommendations and has taken significant steps to implement measures to tackle illicit finance.”

https://www.fatf-gafi.org/en/publications/Mutualevaluations/India-MER-2024.html

However, the report has pointed out significant gaps in the compliance and oversight of the Designated Non-Financial Businesses and Professions (DNFBPs) sector, particularly in areas considered high-risk, such as real estate, accounting, and trust and company service providers (TCSPs). The report calls for enhanced supervision, outreach, and awareness to ensure DNFBPs meet their obligations under India’s AML/CFT framework.

The definition of DNFBPs in India covers casinos, real estate agents, dealers in precious metals and stones (DPMS), lawyers, notaries, accountants, company service providers and societies/firms, NPOs, chartered accountants and the Registry of Companies.

Here are some of the observations from the report around DNFBPs:

1. Suspicious Transaction Reporting (STR)

The report highlights the need for DNFBPs to improve detection of suspicious transactions and increase the number for suspicious transaction reports (STRs) filed by DNFBPs with the Financial Intelligence Unit of India (FIU-IND), especially by high-risk sectors, such as real estate agents, accountants, and TCSPs.

During the on-site evaluation, only a small percentage of DNFBPs were registered , demonstrating a sector-wide lack of readiness to report suspicious activity. The limited number of STRs was noted to significantly impact the FIU’s ability to detect and prevent ML/TF. The lack of reporting in high-risk sectors was heavily weighted in the report’s overall assessment of DNFBPs.

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2. Supervision

The FATF evaluation found that supervision for DNFBPs is less developed, particularly for high-risk sectors, especially as many of these sectors have only recently been designated as reporting entities under India's AML/CFT framework. For instance, supervisors for professionals such as accountants, company secretaries, and lawyers were only designated in May 2023, and their supervision is still in its early stages. Real estate agents have made some progress in compliance monitoring, but this covers only a fraction of the sector.

While some DNFBPs have demonstrated compliance with customer due diligence (CDD) and record-keeping obligations, others are lagging in critical areas such as beneficial ownership (BO) identification and targeted financial sanctions (TFS) implementation.

Enforcement actions, while limited, have primarily focused on real estate agents and casinos. However, DNFBP supervisors, including those for accountants and company secretaries, have yet to begin conducting AML/CFT inspections. Instead, supervisors have opted for informal remedial actions like outreach and feedback on compliance gaps, collaborating closely with FIU-IND to improve STR reporting across the sector.

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3. Proliferation Financing (PF) and Targeted Financial Sanctions (TFS) Obligations

The report points to a need for enhanced outreach and capacity building for DNFBPs, particularly in relation to their TFS and PF obligations. Many DNFBPs are still in the early stages of acquiring commercial sanctions screening software or building monitoring systems to meet their TFS ?& PF obligations. Smaller DNFBPs lack the resources to invest in commercial screening tools and often rely on manual processes, which increases the risk of non-compliance. These entities, in particular, are struggling with the complexity of implementing sanctions freezes, and FATF emphasizes the need for more clear and consistent guidance for these sectors.

FIU-IND has been proactive in supporting newer DNFBP supervisors through joint outreach efforts, in-person and virtual training sessions, and the publication of guidance, especially around awareness of sanctions evasion techniques and the steps required to implement sanctions freezes without delay. This outreach should be sustained to ensure DNFBPs have the tools and knowledge necessary to meet their AML/CFT obligations.

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4. Risk-Based Supervision and Future NRAs

While outreach on the 2002 National Risk Assessment involved many DNFBPs across India, there were a significant number of entities that were not engaged.

FATF recommends that DNFBPs be given more weight in future National Risk Assessments (NRAs), particularly in light of their recent designation as AML/CFT reporting entities. As risk-based supervision continues to evolve, DNFBPs will need to be more closely monitored to ensure they are mitigating the inherent risks associated with their sectors.

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5. Due Diligence and Record Keeping

Real estate agents and casinos have demonstrated more advanced application of risk-based due diligence measures compared to other professionals. However, implementation varies widely across the sector. Supervisory findings indicate that while most DNFBPs comply with basic AML/CFT obligations, challenges remain in areas such as customer due diligence (CDD) for customers onboarded prior to 2022 and the identification of beneficial owners (BO).

DNFBPs are generally compliant with record-keeping obligations, maintaining records in both electronic and hard copy form for a minimum of five years. These records are accessible to FIU-IND and law enforcement agencies upon request, providing a positive indication of compliance in this area.

Looking ahead

It is evident that the DNFBP sector in India will be expected to elevate their compliance standards to match the evolving demands of the country’s AML/CFT framework. While the sector will benefit from greater outreach and capacity building, it will need to play a more proactive role in compliance in general, and detecting and reporting suspicious activities in particular. At the same time, it can expect much greater scrutiny, enhanced supervision, and likely enforcement action for non-compliance.

Fintelekt is committed to #AML / #CFT capacity building amongst reporting entities and other stakeholders. Our recent 2-hour Awareness Training Programme on AML Compliance in DNFBPs on September 11, 2024 comprehensively addressed AML obligations for this sector. https://www.dhirubhai.net/posts/fintelekt-advisory-services_aml-cft-compliance-activity-7228298079714594816-xrs4?utm_source=share&utm_medium=member_desktop

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