Q.Money laundering poses a serious threat to country’s economic sovereignty. What is its significance for India and what steps are required to be taken to control this menace?

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Significance of Money Laundering for India

• Destabilization of Financial Systems: Illicit money entering the banking system undermines the financial sector. According to the Reserve Bank of India (RBI), banks reported nearly ₹150 billion in suspicious transactions between 2018 and 2023, highlighting the destabilizing impact of unregulated funds entering the system.
• Threat to National Security: Money laundering channels are often used for terrorism financing. For instance, in 2019, Indian authorities uncovered a large hawala network that funded terrorist activities in Jammu & Kashmir, underlining the connection between money laundering and national security threats.
• Economic and Revenue Losses: The Tax Justice Network estimates that India loses more than ₹3 trillion annually due to tax evasion linked to money laundering. This deprives the government of essential resources for public infrastructure and welfare schemes.
• Corruption and Black Money: A significant portion of India’s black money, estimated to be over ₹30 lakh crore, is funneled into offshore accounts or laundered through real estate, gold, and other assets. This has been a major hurdle in curbing corruption and enhancing governance.
• Impact on International Relations: India’s ranking in the Basel AML Index 2023, which assesses countries’ anti-money laundering risk, stood at 51 out of 152 countries. This raises concerns about India’s global standing in terms of financial transparency and its ability to attract foreign investment.

Steps Required to Control Money Laundering

• Strengthening Legal Framework: India’s Prevention of Money Laundering Act (PMLA), 2002 has been instrumental in combating money laundering, but enforcement needs to be more stringent. In 2021, only about 4% of cases registered under the PMLA resulted in convictions. Tougher penalties and faster legal proceedings are essential for more effective deterrence.
• Enhancing Coordination Between Agencies: Better coordination is needed between agencies like the Enforcement Directorate (ED), Financial Intelligence Unit (FIU-IND), and Income Tax Department. In 2020, the ED seized assets worth ₹1,984 crore in cases related to money laundering, showcasing the need for continuous cross-agency cooperation.
• Tightening the Financial Sector’s Monitoring: Financial institutions must be more vigilant in identifying and reporting suspicious activities. According to the Financial Intelligence Unit (FIU), Indian banks filed over 1.8 million Suspicious Transaction Reports (STRs) in 2020, highlighting the importance of enforcing Know Your Customer (KYC) and Anti-Money Laundering (AML) norms.
• International Cooperation: As money laundering often involves cross-border transactions, India must strengthen international cooperation. In 2022, India joined the Egmont Group, an international body of 167 countries focused on combating money laundering, to share information and resources for combating cross-border financial crimes more effectively.
• Public Awareness and Reporting Mechanisms: Building public awareness through campaigns and creating a safe environment for whistleblowers is crucial. The Whistle Blowers Protection Act, 2014, if fully implemented, can provide greater protection to individuals who expose money laundering schemes, boosting transparency.