Some Thoughts on the FATF Mutual Evaluation Report for India

It is here. Lisan Al Gaib. The moment many were waiting for. If you do not know what I am referring to, then you need to rouse yourself from your stupor, fast. The Financial Action Task Force (FATF) has published its Mutual Evaluation Report (MER) for India, and the country has passed the evaluation with flying colours as the Press Information Bureau gleefully announced. This mutual evaluation was the exercise which prompted all branches of the Indian State to ignore constitutional separations and unite to permit an extension for the officer who could no longer serve in office — the Director for the Directorate of Enforcement — and look how wonderful it all turned out. Kudos to one and all.

What is FATF, its MER, and why must you care?

Some context on what the FATF and the MER are is necessary before we proceed. Essentially, the FATF is a body setting global standards on combating money laundering and terrorist financing (and also what it has labelled 'proliferation financing). What began as a cabal comprising a few nations slowly attained pure global status as the 'rich' countries decided that those who do not meet the FATF standards are markets too risky to invest in. Ergo, no FATF compliance slowly meant being cut off from financial markets, which in today's world meant economic peril. 

Like many countries aspiring to gain greater influence on the world stage, India has aggressively worked to become a full-time FATF member (which it became in 2010), and then comply with recommendations on how to improve the anti money laundering and countering of terrorist financing frameworks. These recommendations are the result of site visits by FATF assessment teams, who eventually publish the MER. Adoption of the MER is followed by a 'Follow-Up Report' to see how the country has fared in adopting recommendations made in the MER. The scope of the MER exercise ranges beyond merely the legal framework devised to combat money laundering and financing of terrorism and looks at issues of state capacity and knowledge sharing as well.

India's last MER cycle happened in 2010-2013 i.e. more than a decade ago, which was hardly five years after the enforcement of the Prevention of Money Laundering Act 2002 (PMLA). It was due for a review earlier but Covid-19 intervened, pushing the review to 2023. A measure of just how important the FATF process is for a country can be gleaned from how India's money laundering and terrorist financing laws have been amended over time to specifically address shortcomings identified in the MER, transforming the PMLA into the hydra-headed behemoth that it is today. Perhaps the biggest change being India's shift from having a money laundering law with a narrow catchment to a law which would be far more encompassing in scope (discussed here). 

Given this background, it is imperative for everyone to wake up and take note of just what the latest MER says and does, for it is as reliable a fortune-teller as you can get as to what trends will India's anti-money laundering enforcement take. But that's not all. At a time when an already secrecy-loving State has gone into overdrive to prevent public disclosures about its workings, the MER gives us a window into how the anti-money laundering machinery is working behind the scenes.

What the MER tells us about India's Legal Regime

There are many points of note here, so for ease of reference (and my own laziness), I have resorted to the use of pointers. Note that I do not engage with the FATF assessment of India's terrorism financing regime and anti-money laundering measures in the economy. 

• For starters, the MER shows us that behind the veil of secrecy in which the Enforcement Directorate operates — remember that it refuses to publish ECIRs, or its practice manual, and convinced the Supreme Court that yes it is not necessary to do so — lies a wealth of administrative circulars and papers guiding the Enforcement Directorate's functioning in theory. Granted, these are only internal documents that cannot confer rights upon persons, but it would be interesting for courts to examine how often are these circulars breached in practice. 
• The MER confirms what most of us familiar with the money laundering regime knew — pendency in PMLA cases is quite high. The FATF has concluded that this needs capacity building with more special courts / prosecutors etc. More on that in the next section.
• The MER also confirms the sequitur, that India is not securing many confiscations of assets alleged to have been involved in money laundering, because confiscations are mainly linked to convictions. But at the same time, the FATF lauds India's proactive approach to attaching allegedly assets, which for the FATF reflected India's commitment to tackling money laundering seriously. Again, thoughts on this follow in the next section.
• Even though previous reports had criticised the lack of non-conviction based confiscation, there is no adverse remark this time. Equally surprising is the total lack of any mention about the appellate authority on matters of confiscation not being operational for several months prior to 2023. 
• The FATF has noted that India's approach listing out predicate offences is not fully in-line with the FATF recommendations (see technical compliance summary).
• What the government has not mentioned in its laudatory press release, is that India has been rated 'Partially Compliant' in respect of how the anti-money laundering regime is affecting the non-profit sector. This is a damning indictment, which buttresses domestic criticism of abusing legal rules to unfairly target NGOs (see technical compliance summary).   
• Reading the MER it appears that the FATF has left feeling convinced that many problems in respect of enforcement in PMLA were the result of the delays caused by the Supreme Court's consideration of the legality of the PMLA regime. The MER notes that this consideration concluded in 2022 with the Supreme Court upholding the PMLA regime, and hoped that this would begin to curb delays.

If past experience is a reliable indicator, then one imagines there may be some legislative amendments to (i) change the scheduled offences list, (ii) introduce some checks and balances to improve the rating for the non-profit sector issues, (iii) explore / expand non-conviction based confiscations further, and (iv) take steps (besides increasing budgetary outlays) to combat delays in money laundering cases. 

Critiquing the FATF's Findings

I have made my prejudices slightly bare about what the FATF is and what it does. But even so, there is no doubting its importance in the global landscape today. Accepting this premise, what one would then expect is an exercise which engages with diverse stakeholders and views countering the dominant narrative that is offered by a set of representatives that are obviously invested in securing a positive result. In this regard, a reading of the MER leaves one slightly baffled as to some of the observations and conclusions. I give two examples out of many.

First, consider the section which deals with attachments. At Paragraph 294 the MER notes that "The routine manner in which ED attaches assets at an early stage of investigations is a significant strength of the system, as it substantially reduces the risk of asset flight and also acts as a deterrent." It then gives us the statistics of how provisional attachment proceedings fare before the Adjudicating Authority over the past 5 years (Table 3.17) to reveal that from 2022 till October 2023, not a single provisional attachment was set aside. This, for the FATF, is a great outcome.

I pause here and wonder, did nobody in the FATF think that it would be good to maybe take a look at any one of the 390 provisional attachment orders issued, and 390 confirmations returned by the Adjudicating Authority, to examine whether this is bearing out its assumptions of a system in rude health? Did nobody in the garlanded team of experts pause to wonder that, maybe, this instead reflects a system that is working mechanically to first attach assets to bulk up numbers, and then for the Adjudicating Authority to routinely allow attachments by passing remarkably unreasoned orders? Did nobody bother to check how many of the orders were set aside in appeals, before the appellate authority and high courts? Such an uncritical and frankly naive assumption from the data left me quite amazed.

The second is the FATF's engagement, or lack thereof, with the Supreme Court's 2022 decision that finds such a frequent mention in the report. This judgment, of course, is Vijay Madanlal Choudhary, which has been a frequent topic of conversation over the past two years. My criticism of the FATF is twofold in this regard, so in a sense there are points 2A and 2B here. Point 2A is that the FATF again behaves like a doe-eyed deer in simply accepting the government's version that the pendency of this verdict caused delays. A look at the lead-up to the judgment would reveal that the government was not a passive object, but many a time it went to get a stay on proceedings as well, and frequently delayed hearings by taking adjournments. 

But this is the minor quibble. Point 2B is the FATF's reluctance to engage with the 2022 verdict besides a passing observation that the Supreme Court upheld the legal regime. By not probing further as to what has been the aftermath of Vijay Madanlal Choudhary, the FATF did itself a huge disservice, and I would argue it directly tainted some of the data in the report in respect of money laundering prosecutions. If the FATF dug deeper, it would have learnt that just before, and after, Vijay Madanlal Choudhary, courts began to set aside money laundering cases where the predicate offence no longer survived. But by framing the fate of PMLA prosecutions in a binary of 'acquittal vs. conviction', the FATF fails to capture this growing number of cases where the money laundering prosecution is quashed by the appellate court. This naturally affects how we perceive the effectiveness of the money laundering regime.

Further, greater engagement with Vijay Madanlal Choudhary may have also made the FATF think twice about its assumption that simply getting more special courts will curb delays. It may help, sure, since the numbers of judicial appointments and institutional capacity are poor across the board in India for all cases. But I would argue that it is unlikely to prove a game-changer and that delays will remain endemic to the prosecution of money laundering cases because of how the legal regime is structured. The inextricable link between the underlying predicate offence and the money laundering allegation suggests there should be greater synergy in the two sets of issues, but besides allowing for trials to happen in the same court, there is no legal measure to reduce inefficiency. Thus, the same judge deals with two trials, with two different procedural regimes, helmed by two separate investigating agencies and prosecuting teams, which bring in two separate sets of voluminous yet repetitive documents, with separate accused persons bearing different evidentiary burdens. And, of course, run these in tandem.  

Why We Must Not be Fooled by the FATF Report

A word of caution before we close this post. As I mentioned above, the grandstanding about the MER has already begun. It is critical to remember that, as glowing as the FATF review of India's money laundering regime may be projected in some quarters, the entire FATF exercise has absolutely nothing to say on the use of coercive powers by states for combating money laundering. For good reason too. Remember that the FATF is interested only in testing countries for compliance across a set of recommendations (presently 40 in total) and it has no time to deal with issues outside of those. One look at the 40 recommendations will tell you that how a country uses coercive powers of arrest, and how it frames its laws on bail in money laundering cases, is not the FATF's concern.

In other words, a glowing FATF review is not a glowing review of the entire PMLA or its implementation.