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Warning that burgeoning black money, remittance systems and porous border were triggering money laundering at an alarming pace, the International Narcotics Control Strategy of the State Department in its 2011 report said the Indian government should facilitate development of alternative money transfer services including mobile banking.
The report said because of prevalence of an informal economy, India had become a significant target for money launderers and terrorist groups.
"India faces an increasing inflow of high-quality counterfeit currency, which is produced primarily in Pakistan but smuggled to India through multiple international routes," the report said.
"Criminal networks exchange counterfeit currency for genuine notes, which not only facilitates money laundering, but also represents a threat to the Indian economy," it said.
The State Department report comes at a time when strident calls are being made in India for action to make public names of persons holding illegal foreign bank accounts, with political parties saying that they fear that the staggering amounts stashed in these accounts are laundered money.
The State Department report said the tax avoidance and the proceeds of economic crimes (including fraud, cyber crime and identity theft) are still the mainstay of money launderers in India, but laundered funds are also derived from human and narcotics trafficking, transnational organised crime, illegal trade, particularly in endangered wildlife and illegal gems (principally diamonds), and corruption.
Noting that India is a significant target for terrorist groups, both external and domestic, the report said most terrorist activities are conducted by international terrorist groups and entities linked to the global jihad, with the support of both state and non-state external actors.
In addition, several domestic separatist and insurgent groups are active.
Terrorist groups often use counterfeit currency and hawaladars, as well as physical cross-border currency smuggling, to move funds from external sources to finance their activities in India, it said.
The State Department report recommends that the Indian Government should press for presidential approval to implement the Foreign Contribution (Regulation) Act 1976, which would extend foreign contribution reporting requirements to any non-profit organisation that has a political, cultural, economic, educational or social focus and automate notification of suspicious transactions to the FIU.
It also recommended the Indian Government to facilitate development of alternative money transfer services, including mobile banking.
"This expansion of legitimate, accessible services would allow broader financial inclusion of legitimate individuals and entities, and reduce AML/CFT vulnerabilities by shrinking the informal network," said the 2011 International Narcotics Control Strategy Report of the State Department.
The Indian Government should also extend the Prevention of Money Laundering Act to include gem and precious-metals dealers, real estate agents, lawyers, notaries, other independent legal professionals, accountants, and commodity futures brokers and to clearly add a safe harbour provision for those filing STRs in good faith.
The government should ensure reporting entities fully implement appropriate due diligence procedures, to include both computerised tracking systems and active engagement by trained frontline personnel.
It should also emphasise the importance of human intervention and analysis in terrorist financing cases, as the varied profiles of these cases may not trigger an automated report, the State Department said.
