Fact Box : India’s Measures on Money Laundering and Illicit Funds Issues

London Summit and Pittsburg Summit

• At G-20 Finance Ministers meeting held in London on 4-5 September 2009 and the Pittsburg Summit on September 24-25, 2009, India played an active role in finalizing the Declarations which included delivering an effective programme of peer review, capacity building and counter measures to tackle non-cooperative jurisdictions that fail to meet regulatory standards.
• As a result, all the tax havens have now agreed to end the bank secrecy.
• They have also agreed for not applying the principle of dual criminality while exchanging information for tax purposes. Countries are also willing to enter into Tax Information Exchange Agreements in the absence of a tax treaty.

Global Forum on Transparency and Exchange of Information for tax purposes

• The Global Forum has been the multilateral framework within which work in the area transparency and exchange of information has been carried out by both OECD
  and non-OECD economies since 2000.
• India is playing a very active role as a Vice Chair of the Peer Review Group of the Global Forum on Transparency and Exchange of Information for tax purposes and making a positive contribution.

Task Force on Financial Integrity and Economic Development

• The Task Force on Financial Integrity and Economic Development is a unique global coalition of civil society organizations and more than 50 governments working together to address inequalities in the financial system that penalize billions of people.
• Launched by Global Financial Integrity in January 2009, the Task Force advocates for greatly improved transparency and accountability in the global financial system.

The Task Force advocates five priorities – curtailment of mispricing in trade imports and exports; country-by-country accounting of sales, profits, and taxes paid by multinational corporations; confirmation of beneficial ownership in all banking and securities accounts; automatic cross-border exchange of tax information; and harmonization of predicate offenses under anti-money laundering laws – each one focusing on transparency. India has also joined the Task Force on Financial Integrity and Economic Development in order to bring greater transparency and accountability in the financial system.

Financial Action Task Force (FATF)

The popular term used for Groupe d'action financière (GAFI) is Financial Action Task Force. The Financial Action Task Force (FATF), an inter-governmental body, responsible for setting global standards on anti-money laundering (AML) and combating the financing of terrorism (CFT).

• It was established in 1989 by the members of G7.

Forty Recommendations have been issued by the FATF in 1990 which were last revised in 2003. Some of them include implementing the international conventions of this relevance and criminalizing money laundering and enabling authorities to confiscate the proceeds of money laundering.

• 8 Special Recommendations on Terrorist Financing were issued by FATF in the wake of 9/11 attacks
• A 9th Special Recommendation on Terrorist Financing was issued in October 2004.
• So the current status of FATF recommendations is 40+9.

Current members are 36 (34 countries and 2 regional organizations viz. European Commission and Gulf Cooperation Council).

• Since 2006, India was an observer member of FATF. In this context a joint FAFT / Asia Pacific Group Mutual Evaluation Team had visited India in October and November 2009 and the team found India fully in compliance with the 40+9 Recommendations of FATF.
• This team prepared a Mutual Evaluation Report on India and the India´s Membership issues.
• In the FATF Plenary -XXI, which was held on June 24-25, 2010 at the Amsterdam (capital and largest city of the Netherlands), the report was adopted and India was admitted as 34th Country Member of FATF.
• India has joined as the 34th member of Financial Action Task Force (FATF) on 25th June 2010. FATF membership is important as it will help India to build the capacity to fight terrorism and trace terror funds and to successfully investigate and prosecute money laundering and terrorist financing offences.
• India has ambitions to become a major player in the International finance. This membership will help India

1. To build the capacity to fight terrorism and trace terrorist money
2. To successfully investigate and prosecute money laundering and terrorist financing offences
3. In securing a more transparent and stable financial system by ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups.
4. In co-ordination of AML/CFT efforts at the international level.

Eurasian Group (EAG),

• On 15th December 2010 India gained membership of the Eurasian Group (EAG), which is a Financial Action Task Force (FATF) styled regional body, responsible for enforcing global standards on anti-money laundering (AML) and combating the financing of terrorism (CFT) in the Eurasian region.
• The Eurasian Group is strategically and geopolitically important for India to fight financing of terrorism and money laundering through drug trafficking and fake Indian currency notes.
• The Eurasian group on combating money laundering and financing of terrorism (EAG) is a FATF(Financial Action Task Force) style regional body uniting 9 countries viz. Belarus, India, Kazakhstan, China, Kyrgyzstan, Russia, Tajikistan, Turkmenistan and Uzbekistan.
• 16 more states and 16 international and regional organizations have observer status within the EAG.
• India was up till now an observer member. India has now got the full membership of this group.
• EAG is a regional body responsible for enforcing global standards on anti-money laundering (AML) and combating the financing of terrorism (CFT).

India's DTAAs

• India has Double Taxation Avoidance Agreements (DTAAs) with 79 countries. India needed modifications in as many as 74 DTAAs to broaden the scope of article of exchange of information to include exchange of banking information.
• The process was given an impetus when letters were issued to 65 countries (between April to November 2009) for initiating the negotiations to modify the relevant articles in DTAAs. Ongoing negotiations with 9 countries were put on the fast track.

DTAA with Switzerland was signed on 30th August 2010 and is now before the Swiss Parliament for approval. Once the Swiss Parliament grants the approval, DTAA will become operational.

• While negotiating new DTAAs with 15 countries, we have ensured that articles concerning exchange of information are in accordance with the international standards and specifically provide for exchange of banking information.
• Two new DTAAs have been notified and in 11 more, negotiations have been completed and are in the advanced stage of finalization. Negotiations are in progress in another 2 DTAAs.

India's TIEAs

• India has prioritized 22 countries/jurisdictions for negotiations and signing of Tax Information Exchange Agreements (TIEAs).
• These jurisdictions are popularly known as 'tax havens'.
• Of these 22 prioritized countries/jurisdictions, we have completed negotiations with 10, negotiations are under progress in 4 and the response is awaited from 4 countries/ jurisdictions.
• These 4 wanted to sign DTAA instead of TIEA.
  • At the instance of Indian Finance Minister, G20 communiqué has made mandatory the signing of TIEAs in case any country demands this instrument with low or no tax jurisdictions/countries.
    

To sum up, a total of 23 negotiations in line with international standards have been completed for DTAAs and 10 for TIEAs. In 31 cases, DTAA negotiations and in 5 cases, TIEA negotiations are in progress.

Prevention of Money Laundering Act (PMLA)

• On 1st June 2009, the Prevention of Money Laundering Act (PMLA) was amended whereby the predicate offences listed in the Schedule to the Act were substantially increased in terms of the Acts covered and sections covered under such Acts.
• This amendment has tremendously widened the scope of money laundering investigations by the Directorate.
• In a number of such investigations, the Directorate has initiated overseas enquiries and forwarded Letters of Request to foreign administrations for not only collection/verification of information but also for obtaining evidence. The provisions of the Act also allow for causing attachment of the tainted proceeds located abroad by requesting the foreign administrations through Letters of Request issued by competent courts
  

Provisions on Transfer Pricing

• The existing transfer pricing provisions which were introduced in the year 2001 do not have detailed provisions as compared to transfer pricing provisions of developed countries.
• There is need to upgrade these transfer pricing provisions to meet the challenges of growing intangible economy and various complex cost sharing arrangements.
• As per directions of FM, DGIT (International Taxation) has constituted a committee to look into the issue of revising the transfer pricing provisions. The committee will submit its report by March 2011.

Black Money in Direct Taxes Code Bill

Following specific new legislation for unearthing black money in the Direct Taxes Code Bill

1. For the purpose of levy of wealth tax, taxable assets have been defined to include deposits in banks located outside India in case of individual, unreported bank deposits in case of others, interest in a foreign trust or any other entity (other than foreign company) and any equity or preferential shares held in a controlled foreign company.
2. The General Anti Avoidance Rule (GAAR) has been incorporated to deal with aggressive tax planning devices used to circumvent tax laws.
3. Specific Controlled Foreign Company (CFC) rules have been incorporated to bring to tax passive income earned by residents from substantial shareholding in companies situated in low tax jurisdictions.
4. A reporting requirement has been introduced making it obligatory on the part of resident assessees to furnish details of their investment and interest in any entity outside India in the form and manner as may be prescribed.

Income Tax Overseas Units

• Income-tax overseas units in eight countries namely USA, UK, Netherlands, Japan, Cyprus, Germany, France and UAE have been created. India is in the process of deploying officers at these locations. As on date, we have two Income-tax overseas units located in Mauritius and Singapore and these units are providing valuable information.

Transfer Pricing audit

• The Government has taken steps to strengthen our Transfer Pricing audit. The TP regulation came into force in India only in 2001.
• It took us some time to gain expertise. Within a short span of time, Indian TP auditors have made adjustments worth Rs.45,000 crore.
• For cases under MAP, quite a substantial part of the additions have also been confirmed in MAP resolution, which speaks highly about the quality of the TP audits.