Regulation and Compliance: India bolts on more business areas

One of India's biggest problems when starting to design and implement a counter-money laundering strategy is not any of those that we might expect. It is not, for example, that it is estimated that just 2% of the population pay income tax, nor that of the 1,000 million people a tiny fraction have access to or use normal banking services. It is not that telephones and other forms of communication across much of the country are not merely rubbish, they are in many cases almost entirely absent.

It is not that the official language of the country as a whole is English but that many different languages and dialects are spoken - in many parts of the country to the exclusion (by neglect not design) of English.

It is not that the country is huge and the population is remarkably diverse in culture, religion and - effectively - ethnicity and (for some radicals who want to break away) nationality.

It is not, even, the caste system that causes the problems.

It is this: all counter-money laundering strategies are driven by governments and they come from the top. They work because governments have power to force financial institutions to comply under pain of penalty for corporations and - even more so - individuals. And the system - in all countries - has started with banks and moved down into other organisations. In India, most banks are state owned.

The time frame for that has, across almost the whole world, been banks were first in or about 1990 for drugs money purposes, and then wider areas of predicate crime were added along with other business areas.

The lagards in both of these areas - primarily the USA and Australia - have been busy tidying up their Acts. India somehow got left behind.

Part of the reason is simple: way back in the mid 1990s, India asked the FATF for help. It warned of hawala-type systems and said that the country was being bled of liquidity as a result of vast expatriations of funds by parallel banking mechanisms. Indeed, the whole Indian government fell when it was found that many ministers were siphoning off huge sums and shipping them off abroad.

But the FATF paid no heed: "it's not on our members' radar," the then FATF General Secretary told World Money Laundering Report.

The USA Treasury demonstrated an ignorance of India's financial sector that was terrifying when, just after the passing of the USA PATRIOT Act, its then secretary turned up in India and complimented the Indian banking sector on its counter-money laundering handbook, saying he had not seen anything else like it anywhere in the world. At that time, the USA remained focused on the banking sector for money laundering risk and it was not for several years that it finally came (more or less - actually less) into compliance with the FATF 40 + 9 recommendations insofar as regulated business areas are concerned.

Although the USA progressed with most of the "enlargement" provisions under the USA PATRIOT Act and Australia added lots of areas, too, India remained fixated on money in the banks.

That was not where money laundering has grown. It's grown in money transmission (again), in transfer pricing and expatriation of funds within business groups and in the securities industry. Indeed, The Anti Money Laundering Network has issued a "health warning" for the Indian securities industry.

In part that is because of the bald truth that, until the last week, the securities industry has, mostly, been outside the "know your customer" regime. And that means, simply, no data upon which suspicious transaction reports might be based.

So why has India taken so long?

The regulatory regime is, to be polite, shambollic. It is, to a degree, similar in structure to that in the USA: multiple regulators, cross-overs, holes and a general problem in deciding who has power.

That has been - at least to a sufficient degree for the immediate purposes - been resolved with some new law: the Reserve Bank of India has been joined by other regulators who have to require those the supervise to put in place systems to detect and deter money laundering. And to report it.

In the past year, a wide range of businesses were added.

But it's the batch in the last week that are especially interesting:

- The Securities and Exchange Board of India (Sebi) - mutual funds and stockbrokers,

- The Insurance Regulatory Development Authority (IRDA) - insurance, and

- The Forwards Markets Commission (FMC) for commodity trading.

India is desperate to join the FATF: it regards it as a matter of national pride.

The FATF for its part has a history of granting admission to countries that have complied on paper - China and Russia are but two examples - when implementation and enforcement are, at best, terrible.

India looks like joining on that basis.

For its banking sector is, largely, state owned. Enforcement, then, is one civil servant ordering another to face investigation. It doesn't happen very often.

However, insurance and broking is not nationalised. Nor are the other business areas that are affected.

For that reason alone, there is some chance that things might improve.