Recent Indian Policy Initiatives and Reforms to Curb Iffs

Illicit Financial Flows (IFFs) refer to the cross-border movement of capital that is illegally earned, transferred, or utilized. In India, these flows stem from tax evasion, trade misinvoicing, hawala channels, corruption, and organized crime. To stop capital flight and safeguard public revenue, the Indian government has implemented comprehensive statutory, institutional, and regulatory measures. These initiatives aim to enhance transparency, improve international cooperation, and dismantle illegal financial networks.

Statutory Frameworks and Legislative Acts

Black Money Act, 2015

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 targets undisclosed foreign assets and income held by Indian residents. It imposes a flat tax rate of 30% alongside a 300% penalty on the tax amount for non-disclosure. Offenses under this Act carry rigorous imprisonment of up to 10 years.

Prevention of Money Laundering Act (PMLA), 2002

Enacted to prevent money laundering, the PMLA grants powers to attach and confiscate proceeds of crime. Recent amendments broadened the definition of reporting entities. Designated Non-Financial Businesses and Professions (DNFBPs), including chartered accountants, company secretaries, real estate agents, and Virtual Digital Asset (VDA) service providers, now fall under strict Anti-Money Laundering (AML) reporting obligations.

Fugitive Economic Offenders Act, 2018

This Act targets economic offenders who flee Indian jurisdiction to evade criminal prosecution. It applies to cases where the total value of the economic offense exceeds ₹100 crore. The law empowers authorities to attach and confiscate properties of the offender, including assets not directly linked to the proceeds of crime.

Benami Transactions (Prohibition) Amendment Act, 2016

This law prohibits transactions where property is held by one person while the consideration is paid by another. It provides for the absolute confiscation of benami properties by the Central Government without compensation. Offenders 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 (Beneficial Ownership Rules)

Section 90 of the Companies Act introduced rules regarding Significant Beneficial Owners (SBO). Companies must identify individuals holding an ultimate beneficial interest of 10% or more in corporate entities. This measure restricts the misuse of shell companies, layered structures, and round-tripping of funds.

Institutional Mechanisms and Administrative Reforms

Financial Intelligence Unit – India (FIU-IND)

Established in 2004 under the Ministry of Finance, FIU-IND serves as the national agency responsible for receiving, analyzing, and disseminating financial intelligence. It processes Cash Transaction Reports (CTRs), Suspicious Transaction Reports (STRs), Cross Border Wire Transfer Reports (CBWTRs), and Non-Profit Organization Transaction Reports (NTRs) from reporting entities.

Economic Intelligence Council (EIC)

The Economic Intelligence Council functions as the apex coordinating body for economic intelligence gathering in India. Chaired by the Union Minister of Finance, the council ensures inter-agency coordination among the Central Board of Direct Taxes (CBDT), Central Board of Indirect Taxes and Customs (CBIC), Enforcement Directorate (ED), and intelligence agencies.

Enforcement Directorate (ED)

The Directorate of Enforcement operates under the Department of Revenue. It enforces the PMLA and the Foreign Exchange Management Act (FEMA), 1999. ED investigates cross-border money laundering schemes, hawala networks, and foreign exchange violations.

Serious Fraud Investigation Office (SFIO)

The SFIO is a multidisciplinary organization under the Ministry of Corporate Affairs. Comprising experts from banking, law, taxation, and corporate audits, it investigates complex corporate frauds and financial malpractices.

International Cooperation and Exchange Frameworks

Automatic Exchange of Information (AEOI) and Common Reporting Standard (CRS)

India signed the Multilateral Competent Authority Agreement under the OECD framework. Through AEOI and CRS, India automatically receives financial account information of Indian residents from over 100 foreign jurisdictions every year.

Foreign Account Tax Compliance Act (FATCA)

India signed an Inter-Governmental Agreement (IGA) with the United States to implement FATCA. This agreement facilitates reciprocal exchange of financial data regarding tax accounts held by citizens in foreign financial institutions.

Financial Action Task Force (FATF) Compliance

As a full member of FATF since 2010, India aligns its domestic legal framework with FATF’s 40 Recommendations. In line with FATF standards, India brought crypto asset exchanges and peer-to-peer virtual transactions under the AML/CFT framework, requiring Virtual Asset Service Providers (VASPs) to register with FIU-IND.

Base Erosion and Profit Shifting (BEPS) Action Plan

India implemented the G20/OECD BEPS recommendations to combat aggressive tax planning by multinational enterprises. India introduced Country-by-Country (CbC) reporting requirements and Master File rules under Section 92D of the Income Tax Act, 1961.

Tax Administration and Digital Reforms

Faceless Assessment and E-Invoicing Systems

The Central Board of Direct Taxes launched the Faceless Assessment Scheme to remove physical interaction between taxpayers and tax officers. Under GST, compulsory e-invoicing for business-to-business (B2B) transactions generates real-time data logs, preventing fake input tax credit (ITC) claims and invoice manipulation.

Curbing Trade-Based Money Laundering (TBML)

Trade misinvoicing—over-invoicing imports or under-invoicing exports—is a primary vector for IFFs. India integrated the Customs ICEGATE portal with the Reserve Bank of India’s Data Flow and Processing System (EDPMS/IDPMS) and FIU-IND databases to track foreign exchange receipts against actual physical cargo movements.

Virtual Asset Taxation and AML Alignment

The Finance Act, 2022 introduced a 30% tax on income derived from the transfer of Virtual Digital Assets (VDAs) and a 1% Tax Deducted at Source (TDS) under Section 194S. Off-shore crypto platforms targeting Indian users must mandatorily comply with domestic AML regulations.

Primary Anti-IFF Legislations Comparison

Key Facts for Quick Revision

• Illicit Financial Flows in India originate primarily from trade misinvoicing, tax evasion, hawala transfers, and drug trafficking proceeds.
• Target 16.4 of the Sustainable Development Goals (SDG) calls on member nations to reduce illicit financial flows by 2030.
• FIU-IND was set up in November 2004 under the Department of Revenue, Ministry of Finance, and reports directly to the Economic Intelligence Council.
• Suspicious Transaction Reports (STRs) must be submitted by reporting entities to FIU-IND within 7 working days of arriving at a conclusion of suspicion.
• Cash Transaction Reports (CTRs) are mandatory for all cash transactions exceeding ₹10 lakh in a month or a series of connected monthly cash transactions.
• Under the Black Money Act, 2015, failure to disclose foreign assets in tax returns attracts a flat penalty of ₹10 lakh.
• The threshold for invoking the Fugitive Economic Offenders Act, 2018 is an economic offense involving a minimum of ₹100 crore.
• India became the 34th member of the Financial Action Task Force (FATF) in June 2010.
• Virtual Digital Asset Service Providers were officially designated as reporting entities under PMLA via a Ministry of Finance notification in March 2023.
• The OECD’s Common Reporting Standard allows automatic exchange of financial account information on an annual basis across participating countries.