Indian Reforms to Curb Illicit Financial Flows

Illicit Financial Flows (IFFs) involve the illegal cross-border movement of money earned, transferred or used through tax evasion, trade misinvoicing, hawala, corruption and organized crime. India has responded through a mix of laws, institutions, reporting systems and international cooperation to curb capital flight and protect public revenue.

The focus of these reforms is to improve transparency, trace hidden ownership, strengthen enforcement and close loopholes used by shell entities, offshore structures and digital asset platforms.

Statutory Framework

• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: Targets undisclosed foreign income and assets held by Indian residents.
• Tax and penalty: Imposes a flat tax rate of 30% and a 300% penalty on the tax amount for non-disclosure.
• Punishment: Offences under the Act can lead to rigorous imprisonment of up to 10 years.
• Prevention of Money Laundering Act (PMLA), 2002: Provides for attachment and confiscation of proceeds of crime.
• Expanded reporting net: Recent amendments brought Designated Non-Financial Businesses and Professions (DNFBPs) under anti-money laundering obligations.
• DNFBPs covered: Chartered accountants, company secretaries, real estate agents and Virtual Digital Asset (VDA) service providers.
• Fugitive Economic Offenders Act, 2018: Applies to economic offenders who flee Indian jurisdiction to evade prosecution.
• Threshold: The law is triggered when the total value of the economic offence exceeds ₹100 crore.
• Power of confiscation: Authorities can attach and confiscate properties of the offender, including assets not directly linked to proceeds of crime.
• Benami Transactions (Prohibition) Amendment Act, 2016: Prohibits property held in one name while consideration is paid by another.
• Penalty for benami offences: Provides for absolute confiscation of benami properties without compensation.
• Punishment: Offenders may face rigorous imprisonment of up to seven years and a fine of up to 25% of the fair market value of the property.
• Companies Act, 2013: Section 90 introduced Significant Beneficial Owner (SBO) rules.
• Beneficial ownership threshold: Companies must identify individuals holding an ultimate beneficial interest of 10% or more.
• Purpose: Helps curb shell companies, layered structures and round-tripping of funds.

Institutional Mechanisms

• Financial Intelligence Unit – India (FIU-IND): Established in 2004 under the Ministry of Finance.
• Core role: Receives, analyzes and disseminates financial intelligence.
• Reports handled: Cash Transaction Reports (CTRs), Suspicious Transaction Reports (STRs), Cross Border Wire Transfer Reports (CBWTRs) and Non-Profit Organization Transaction Reports (NTRs).
• Economic Intelligence Council (EIC): Apex coordinating body for economic intelligence gathering.
• Chairperson: Union Minister of Finance.
• Coordination role: Ensures inter-agency coordination among CBDT, CBIC, Enforcement Directorate (ED) and intelligence agencies.
• Enforcement Directorate (ED): Works under the Department of Revenue.
• Mandate: Enforces PMLA and FEMA, 1999.
• Investigation areas: Cross-border money laundering, hawala networks and foreign exchange violations.
• Serious Fraud Investigation Office (SFIO): A multidisciplinary body under the Ministry of Corporate Affairs.
• Expertise: Includes banking, law, taxation and corporate audit specialists.
• Function: Investigates complex corporate frauds and financial malpractices.

International Cooperation

• Automatic Exchange of Information (AEOI) and Common Reporting Standard (CRS): India signed the Multilateral Competent Authority Agreement under the OECD framework.
• Use of CRS: India automatically receives financial account information of Indian residents from over 100 foreign jurisdictions every year.
• FATCA: India signed an Inter-Governmental Agreement (IGA) with the United States to implement the Foreign Account Tax Compliance Act.
• Purpose of FATCA cooperation: Enables reciprocal exchange of financial data relating to tax accounts held in foreign financial institutions.
• Financial Action Task Force (FATF): India has been a full member since 2010.
• FATF alignment: India aligns domestic laws with the FATF’s 40 Recommendations.
• Crypto regulation under FATF norms: Crypto asset exchanges and peer-to-peer virtual transactions have been brought under the AML/CFT framework.
• VASP compliance: Virtual Asset Service Providers (VASPs) are required to register with FIU-IND.
• BEPS Action Plan: India implemented the G20/OECD Base Erosion and Profit Shifting recommendations to curb aggressive tax planning by multinational enterprises.
• CbC and Master File rules: Introduced under Section 92D of the Income Tax Act, 1961.

Tax Administration and Digital Reforms

• Faceless Assessment Scheme: Launched by the Central Board of Direct Taxes to reduce physical interaction between taxpayers and tax officers.
• Significance: Helps lower discretion and improve transparency in tax administration.
• E-invoicing under GST: Mandatory for business-to-business (B2B) transactions.
• Benefit of e-invoicing: Generates real-time data logs and helps prevent fake input tax credit (ITC) claims and invoice manipulation.
• Trade-Based Money Laundering (TBML): Trade misinvoicing through over-invoicing imports or under-invoicing exports is a major vector of IFFs.
• Customs and forex integration: India integrated the Customs ICEGATE portal with the Reserve Bank of India’s Data Flow and Processing System (EDPMS/IDPMS) and FIU-IND databases.
• Purpose of integration: Tracks foreign exchange receipts against actual physical cargo movements.
• Virtual Digital Assets: The Finance Act, 2022 introduced a 30% tax on income from transfer of VDAs.
• TDS on VDAs: A 1% Tax Deducted at Source was introduced under Section 194S.
• Off-shore platforms: Foreign crypto platforms targeting Indian users must comply with domestic AML regulations.

Primary Anti-IFF Legislations at a Glance

Key Prelims Takeaways

• IFF sources in India: Tax evasion, trade misinvoicing, hawala, corruption and organized crime.
• Black Money Act, 2015: Taxes undisclosed foreign income and assets at 30% with a 300% penalty.
• PMLA, 2002: Central law for attachment and confiscation of proceeds of crime.
• DNFBPs under AML: Chartered accountants, company secretaries, real estate agents and VDA service providers are covered.
• Fugitive Economic Offenders Act, 2018: Applies when the offence value exceeds ₹100 crore.
• FIU-IND: Receives CTRs, STRs, CBWTRs and NTRs from reporting entities.
• International tools: CRS, FATCA and FATF compliance strengthen cross-border tracking of illicit funds.