The focus is to ensure the legal system stands the scrutiny of the Financial Action Task Force (FATF) recommendations. India is undergoing a peer review by the UN body, which assesses the technical compliance of its recommendations and the effectiveness of a country’s anti-money laundering and anti-terror financing framework.

“We are a diverse country with a huge amount of financial transactions every year. The focus of the government’s review is on how robust is the enforcement of the legal framework,” said one of the two people on the condition of anonymity.

India’s economy, which is expected to reach a size of ₹301 trillion in 2023-24 in nominal terms, has over 1.5 million active companies and more than 267,000 active limited liability partnerships (LLPs) now.

Countering tax evasion and the laundering of such funds through complex transactions has been a priority for the government. Various departments and probe agencies now share intelligence to detect circuitous transactions that do not have any economic substance and may be used for money laundering. The previous country review of India’s regulatory framework was conducted in 2010, after which FATF revised its standards.

A key area of the FATF review is the transparency in beneficial ownership of assets, said the second person.

In the latest rule change, the corporate affairs ministry on Saturday stepped up the reporting requirements of LLPs to bring more transparency to beneficial holdings. In August, the government tweaked the rules to allow the Financial Intelligence Unit-India (FIU) to process data on suspicious transactions to share information with goods and services tax (GST) authorities for further probe into possible tax evasion.

In July, the National Financial Reporting Authority’s (NFRA) chairperson, Ajay Bhushan Pandey, urged statutory auditors to understand the overall business purpose and rationale of transactions and show professional care when circumstances like large loans given to entities without repaying capacity warrant a deeper look to rule out embezzlement.

Emails sent to the spokespeople for the ministries of finance and corporate affairs on Monday seeking comments for the story remained unanswered.

Experts said India’s regulatory framework is quite advanced now. The combined effect of laws like the Undisclosed Foreign Income and Assets (Imposition of Tax) Act (the black money law) of 2015, the Prevention of Money Laundering Act of 2002 and the exchange of information among nations have brought India’s regulatory system on a par with that of advanced economies, with respect to defence against money laundering and terror financing, said Sudhir Kapadia, partner, tax and regulatory services at consulting firm EY.

“The authorities have also expanded the scope of taxes deducted at source (TDS) to monitor transactions. With economic expansion, financial sector regulators are moving towards risk-based assessment, where they pick up instances where a red flag has been raised, which is the right way of doing things. It is a work in progress as the economy keeps growing. Digitization and data analytics are the way forward,” said Kapadia.

The corporate affairs ministry earlier this year said companies could issue notices to individuals suspected of having significant beneficial ownership in them but choosing to remain anonymous behind layers of legal entities and, if need be, can seek orders from the National Company Law Tribunal (NCLT) to force disclosures.

Another key area of concern for policymakers in the context of money laundering and terror financing is transactions in crypto assets. India is waiting for a global framework to evolve in this area while implementing a tighter tax regime for virtual digital assets. The International Monetary Fund and the Financial Stability Board are working on a comprehensive policy on crypto assets.

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Updated: 31 Oct 2023, 11:55 PM IST