Warning that the 'hawala' system of illegal money transfer is "directly linked to terrorist financing", the US has urged India to cooperate with international initiatives to check money laundering and strengthen its own control regime.
"Given the number of terrorist attacks in India and the fact that in India, Hawala is directly linked to terrorist financing", a new State Department report says New Delhi "should prioritise cooperation with international initiatives that provide increased transparency in alternative remittance systems".
"India should become a party to the UN Conventions against Transnational Organised Crime and Corruption," said the 2009 International Narcotics Control Strategy Report released here Friday.
India should also pass the Prevention of Money Laundering Act amendments in parliament to strengthen its anti-money laundering or counter-terrorist financing (AML/CTF) regime and to work towards full membership in the international Financial Action Task Force (FATF), the report said.
"India's emerging role in regional financial transactions, its large system of informal cross-border money flows, large underground economy, widespread use of hawala and historically disadvantageous tax administration all contribute to the country's vulnerability to money laundering activities," the report maintained.
"Historically, because of its location between the heroin-producing countries of the Golden Triangle and Golden Crescent, India continues to be a drug-transit country," it said, noting: "The 2008 terrorist attacks in Mumbai intensified concerns about terrorist financing in India."
India's strict foreign exchange laws and transaction reporting requirements, combined with the banking industry's due diligence policy, make it increasingly difficult for criminals to use formal channels like banks and money transfer companies to launder money, the report acknowledged.
"However, large portions of illegal proceeds are often laundered through hawala or 'hundi' networks or other informal money transfer systems," the report noted.
Pointing out that the Indian government neither regulates hawala dealers nor requires them to register with the government, the report cited Indian analysts as suggesting "that hawala operators are often protected by politicians and corrupt officials".
According to Indian observers, funds transferred through the hawala market are equal to between 30 to 40 percent of the formal market. The RBI estimates that remittances to India sent through legal and formal channels in 2007-2008 amounted to $42.6 billion.
India, the report suggested should pass the Foreign Contribution Regulation Bill for regulating non-governmental organisations, including charities, and consider the establishment of a Trade Transparency Unit (TTU) as "in India, trade is the 'back door' to underground financial systems."
India also needs to strengthen regulations and enforcement targeting illegal transactions in informal money transfer channels, the report said.