India’s FATF scorecard: ‘Largely compliant’ but precious metals & stones sectors pose money laundering risks

The Financial Action Task Force (FATF) has called on India to enhance oversight of the precious metals and stones sectors due to concerns over cash transactions that evade monitoring.

The latest Mutual Evaluation Report, released on Thursday, reveals that only 9,500 of the 175,000 Dealers in Precious Metals and Stones (DPMS) are registered with the Gems and Jewellery Export Promotion Council (GJEPC), highlighting significant money laundering and terrorist financing risks. GJEPC membership is mandatory only for businesses involved in the gold and diamond trade.

“The ease with which Precious Metals and Stones (PMS) can be used to move large amounts of funds without leaving an ownership trail combined with the size of the market in India means there are vulnerabilities associated with their use as a tool for ML/TF,” the report said.

Precious metals and stones hold deep cultural significance in India and are a key store of value for many. India is the world’s second-largest gold consumer, the top importer, and the leading exporter of gold jewellery. Its gems and jewellery sector, including diamond polishing and manufacturing, contributes about 7% to the nation's GDP.

The report notes that India’s cash transaction limit for businesses, set at over ₹2 lakh, is stricter than FATF’s anti-money laundering (AML) and counter-terrorist financing (CFT) threshold. However, Dealers in Precious Metals and Stones (DPMS) are regulated through a mix of tax, incorporation, hallmarking, and import/export requirements rather than a single unified strategy. The watchdog also questioned the effectiveness of the penalty provisions.

The report states that the requirement for only DPMS registered with the Bureau of Indian Standards (BIS) to hallmark and sell precious metal jewellery was introduced only recently in April 2023.

DPMS involved in the gold and diamond trade must also register with the Gems and Jewellery Export Promotion Council (GJEPC) and obtain GST registration. Recently, GJEPC removed 84 applicants and rejected 44 renewals due to verification issues, and 224 sanctions were issued to DPMS for GST violations.

The report emphasises the need for a more detailed action plan with clear priorities and measures to address money laundering risks from human trafficking, smuggling, and the precious metals and stones sector.

The findings stem from a review of India's financial system conducted during a site visit in November 2023. The review found progress in monitoring terrorist financing but noted that recent guidelines, such as those for virtual asset providers, are not yet fully assessed.

India, a FATF member nation, has been placed in the "regular follow-up" category and is expected to report to the FATF Plenary in three years, following this report. The anti-money laundering watchdog places countries with inadequate measures against terrorist financing and money laundering on the "grey" or "black" list, which can affect their international borrowing.

Additionally, the report revealed that risk understanding and supervision vary among regulators, with positive results seen in the financial supervision of major sectors. However, the report says that sanctions are not always proportionate or effective.

Supervision of Designated Non-Financial Businesses and Professions (DNFBPs) is underdeveloped, particularly in high-risk areas.

The DNFBP sector in India, accounting for about 14% of GDP, is substantial compared to other countries, driven by the demand for precious metals and stones (7% of GDP) and real estate (5% of GDP).

The report highlights that India's primary money laundering risks involve fraud including corruption, cyber fraud, and drug trafficking. Before January 2023, while there was a broad prohibition on financing sanctioned entities under the WMD Act, specific obligations to freeze funds promptly were not defined clearly.

India's scorecard resembles that of an average student, with ‘substantial’ effectiveness ratings in six parameters and ‘moderate’ scores in the remaining five, including risk policy and international cooperation. In terms of technical compliance, India achieved a "compliant" rating in 11 parameters, "largely compliant" in 26, and "partially compliant" in three areas including non-profit organisations, politically exposed persons, and the regulation of DNFBPs.