Source: 2003
Released by the Bureau for International Narcotics and Law Enforcement Affairs
India is the only country authorized by the international community to produce licit opium gum for pharmaceutical use; other licit producers use different methods. India's strategic location, between the two main sources of illicit opium Southeast and Southwest Asia make it a heroin transshipment area. Although most cannabis and hashish trafficked in India is smuggled from Nepal for export, the northwestern Indian state of Himachal Pradesh increasingly appears to be a center of for growing international hashish trafficking. India is a modest, but growing, producer of heroin destined for the international market. The Government of India (GOI) continually tightens licit opium diversion controls, but an unknown quantity of licit opium is diverted into illicit markets. In 2001, the GOI and the United States conducted a Joint Licit Opium Poppy Survey (JLOPS) to develop a methodology to estimate opium gum yield. The survey results confirmed the validity of a yield prediction methodology under study by the GOI, but lacked key data to apply the study's conclusions to India's 2002/03 licit opium crop. A second, more rigorous, JLOPS was conducted in 2003. The data revealed that Indian poppies have a low opium yield.
India's large and fairly advanced chemical industry manufactures a wide range of chemicals, including the precursor chemicals acetic anhydride (AA) and pseudoephedrine, which can be diverted for the manufacture of illicit narcotics. The GOI, working with the Indian Chemical Manufacturing Association, imposes strict access controls on AA, a chemical used to process opium into heroin. The GOI also fully controls other chemicals, including chemicals that can be used to manufacture methamphetamines. The GOI reviews its chemical controls annually and updates its list of "controlled substances" as necessary, recently adding a chemical the U.S. had requested be controlled. India is a party to the 1988 UN Drug Convention.
Licit opium poppy is grown in the states of Madhya Pradesh, Rajasthan, and Uttar Pradesh under a stringent licensing policy controlled by the Ministry of Finance's Central Bureau of Narcotics (CBN). India is the only country that produces raw opium gum for pharmaceutical use. U.S. pharmaceutical companies that process narcotic raw materials find opium gum is difficult to use because a residue remains after the narcotic alkaloids have been extracted, which must be disposed of with appropriate environmental safeguards. The GOI has supported this traditional opium production method as more suitable to India's agricultural and cultural circumstances than the more capital-intensive--and less diversion prone--concentrate of poppy straw (CPS) process. However, the GOI is examining possible CPS alternatives on a small scale to study their applicability to India's agricultural sector.
It is inherently difficult to control diversion of opium gum collection. Since poppies harvested through Concentrated Poppy Straw (CPS) are not lanced and since the dried poppy heads cannot be readily converted into a usable narcotics substance, diversion opportunities are minimal. However, in India, the sheer numbers of farmers and farm workers (over one million yearly) who come into contact with the poppy plants and their lucrative gum make diversion appealing and hard to monitor. Policing these farmers on privately held land scattered throughout three of India's largest states is a considerable challenge for the CBN.
All other legal producers of opium alkaloids, including Turkey, France, and Australia, produce concentrate of poppy straw (CPS), harvesting unlanced poppy capsules and using a chemical extraction process. India is exploring the possibility of conversion of some of its opium crop to the CPS method. The Ministry of Finance visited several countries that produce CPS in 2003 to observe CPS extraction methods. However, regardless of the GOI's interest in CPS, the costs of the transfer, both in financial and social terms and the difficulty of purchasing the appropriate technology, are daunting. Since alkaloid extraction requires highly specialized equipment, the only places where such equipment and technologies would be available are in the other countries licensed to produce legal opiate alkaloids and thus in countries in direct competition with India.
Under the terms of international agreements, supervised by the International Narcotics Control Board, India must maintain licit opium production and carry-over stocks at levels no higher than those consistent with world demand to avoid excessive production and stockpiling, which could be diverted into illicit markets. India has complied with this requirement and succeeded in rebuilding stocks over the past three years from below-recommended levels. After failed crops caused low stocks, opium stocks now exceed minimum requirements, almost tripling between 1999 and 2003.
Licensed farmers are allowed to cultivate a maximum of 20 "ares" (1 "are" is 100 square meters, so 20 ares equals one-fifth of a hectare). "Opium years" straddle two calendar years. All farmers must deliver all the opium they produce to the government alone, meeting a minimum qualifying yield (MQY) specifying the number kilos of opium to be produced per HA, established by the CBN prior to licensing. At the time CBN establishes the MQY, it also publishes the price per kilo the farmer will receive for opium produced that meets the MQY as well as significantly higher prices for all opium turned into the CBN that exceeds the MQY. The MQYs are based on historical yield levels from licensed farmers during previous crops. Increasing the annual MQY has proven effective in increasing average yields, while deterring diversion, since, if the MQY is too low, farmers could clandestinely divert excess opium into illicit channels, where traffickers often pay up to ten times what the GOI can offer. Thus, an accurate estimate of the MQY is crucial to the success of the Indian licit production control regime.
During the 2002/03 crop year, CBN began to estimate the actual acreage under licit opium poppy cultivation by using satellite imagery, and then comparing it with exact field measurements. The survey was also used in conjunction with satellite imagery of weather conditions and to compare cultivation in similar geo-climatic zones to estimate potential crop yields and determine whether opium was being diverted. The satellite results were then confirmed by on-ground visits mentioned above.
In 2003, CBN again tightened its controls against diversion, conducting 100 percent measurement of each cultivated area. Any cultivation in excess of five percent of the allotted cultivation area was not only uprooted, but the cultivator was also deemed subject to prosecution. During the lancing period, the CBN appointed a village headman for each village to record the daily yield of opium from the cultivators under his charge. CBN regularly checked the register and physically verified the yield tendered at harvest.
The CBN is a significant player in India' overall control regime. The CBN conducts preventive checks and targeted raids based on intelligence to search for opium that might have been concealed by the cultivators. In the past during these raids, CBN officers discovered metric ton quantities (One year, 11 metric tons; the next, 7 metric tons) of concealed opium.
The GOI periodically raises the official price its offices pay to farmers for opium, but illicit market prices are four to five times higher than the base government price. Farmers who submit opium at levels above the MQY are paid a premium, but India's vigorous controls are crucial to avoid significant diversion, and premium prices can only act as a modest positive incentive.
There is no reliable estimate of diversion from India's licit opium industry. The GOI energetically denies that licit opium is diverted on a large scale. Clearly, some diversion does take place; however, it is not possible to pinpoint the amount accurately.
Heroin base ("brown sugar" heroin) is India's most popularly- abused heroin derivative. Indian "brown sugar" heroin is also available in Nepal, Bangladesh, Sri Lanka, and the Maldives. In 2001, the CBN detected and destroyed seven small-scale refining laboratories in India's licit opium poppy growing regions. Beginning in January 1999, Indian authorities have seized increasing amounts of refined ("white") heroin, at least part of which was produced in India, destined for Sri Lanka and Europe.
Policy Initiatives. The amendment of India's stringent Narcotic Drugs and Psychotropic Substances (NDPS) Act of 1985 in October, 2001, brought significant flexibility to the sentencing structure for narcotics offenses in India. It removed obstacles faced by investigation officers related to search, seizure, and forfeiture of illegally acquired property and provided for controlled deliveries to facilitate investigation both within and outside the country. The amended NDPS Act also made it more likely that drug traffickers would be refused bail, particularly those serious offenders who are more likely to flee before trial. It also permitted the freezing of assets of the drug offender prior to a conviction. Penalties are low, however, discouraging full utilization of this provision, based on the argument that the proceduralism is not worth the trouble. In 2002, the value of property forfeited under the NDPS amounted to Rs. 23,636,425 (about $525,253) and the value of property frozen under the NDPS was Rs. 5,233,300 (about $104,000). No figures are available yet for 2003. Further amendments enacted in 2002, expanded entry, search, and seizure provisions in cases relating to financial investigations and controlled substances, giving investigating officers the same powers of investigation in cases related to precursor diversion as they have in other drug investigations.
The amended Act now provides for punishment in three categories, depending on the quantity of drugs seized (small, greater than small but lesser than commercial quantity, and commercial quantity). Punishments range from six months imprisonment and/or a fine of Rs.10,000 ($213) for small quantities; to up to ten years imprisonment and/or a fine of Rs.100,000 ($2,128) for the second category; and from ten to twenty years imprisonment and/or a fine of Rs.100,000- 200,000 ($2,128-$4,256) for commercial quantities.
Prior to the amendment, an individual found in possession of small quantities of a controlled substance was subjected to the same penalties as someone found trafficking in large quantities of narcotics. Judges were reluctant to find small-time traffickers and addicts guilty, as the mandatory sentence was ten years imprisonment. Defendants were frequently released on minor technicalities. The amended Act is expected to increase the conviction rate significantly for future violators of the NDPS. In September 2003, the conviction rate of 34 percent (4826 persons prosecuted, 1644 convictions) will likely reach or surpass the 42.5 percent conviction rate for all of 2002.
In April, 2003, GOI moved the NCB from under the control of the Ministry of Finance to the Ministry of Home Affairs. The Ministry of Finance remains the GOI's central coordinating ministry for counternarcotics and continues to cooperate with the NCB. The move should enhance the NCB's law enforcement capabilities and align the bureau with other GOI police agencies under the control of the Home Ministry. A number of proposals are also under consideration to bolster the professionalism of the NCB.
Accomplishments. In 2003, Indian Customs eradicated over 130 hectares of illicit poppy in the state of Himachal Pradesh. Indian authorities have established a continuous aerial/satellite-based system for monitoring licit and illicit opium cultivation nationwide, which became operational in early 2002 and was enhanced in 2003. During April 2003, pursuant to an ongoing investigation conducted by DEA and NCB, a major Indian heroin and hashish source of supply (SOS) was arrested in Mumbai, based on information obtained in a year long joint investigation for his involvement in the October 2002 seizure of over 1,200 pounds of hashish in Newark, New Jersey. As a result of this investigation, a number of the SOS's co-conspirators were arrested in the U.S. and Europe.
In May, 2003, NCB, working closely with DEA to develop the necessary intelligence, raided a residence in Calcutta and seized a significant quantity of laboratory equipment, some precursor chemicals used in the production of amphetamine, and incriminating documents. In addition, NCB arrested five individuals. This investigation was significant, as it was one of the first documented cases of large Chinese drug trafficking organizations attempting to utilize India as a manufacturing point for controlled substances and the first seizure of an amphetamine production facility in India. The CBN also launched a website to educate and assist importers and exporters on licit opium and precursor chemical requirements.
Law Enforcement Efforts. Through November 2003, NCB seized 668 kilograms of heroin in 3,246 cases. The majority of this heroin was seized in South India. Indian law enforcement agencies also seized 1,403 kilograms of opium in 589 cases and 49 kilograms of morphine in 131 cases through November 2003. The trends so far also show a steep decline in AA seizures, but a steep increase in ephedrine seizures. Cocaine debuted with several small seizures, confirming what news reports and law enforcement agencies said for several years, that cocaine is available in India on the wealthy "party circuit," particularly in Mumbai and New Delhi. Methalqualone seizures are down sharply.
During 2003, reflecting cooperation with drug abuse rehabilitation NGOs, the Delhi Police and Customs began raiding drug stores and wholesalers selling licit opiate pharmaceuticals for illicit use. The Delhi Police seized 40 cartons of buprenorphine with 72,000 injections in India's largest drug wholesale market as well as 25 kilograms of bulk diazepam.
Corruption. The Indian media regularly reports allegations of corruption against law enforcement personnel, elected politicians, and cabinet-level ministers of the GOI. The United States receives reports of narcotics-related corruption, but lacks the information to confirm those reports and the means to assess the overall scope of drug corruption in India. It is a reasonable assumption in a poor country like India that corruption does play some role in narcotics trafficking, despite the government's best efforts. Both the CBN and the NCB periodically take steps to arrest, convict, and punish corrupt officials within their ranks. The CBN frequently transfers officials in key drug producing areas. The CBN has increased the transparency of paying licensed opium farmers to prevent corruption and appointing village coordinators to monitor opium cultivation and harvest. These coordinators receive 10 percent of the total paid to the village for its crops, in addition to what they receive for their own crops, so it is advantageous to them to ensure that each farmer under their jurisdiction turns in the largest possible crop.
Agreements and Treaties. India is a party to the 1961 UN Single Convention on Narcotic Drugs and its 1972 Protocol, the 1971 UN Convention on Psychotropic Substances and the 1988 UN Drug Convention. The United States and India signed a Mutual Legal Assistance Treaty on October 17, 2001, which was ratified by the U.S. Senate, but is awaiting GOI ratification. The United States-India extradition treaty, which entered into force July 21 1999, replaced the 1931 U.S.-UK Extradition Treaty. Two drug-related extradition requests made under the Treaty are pending in Indian courts.
Illicit Cultivation/Production. Small-scale illicit cultivation of opium has existed for years in parts of India's northeast, along the region's border with Burma and China. There is also some illicit cultivation in the states of Himachal Pradesh and Jammu and Kashmir. Customs officials eradicated about 130 ha in Himachal Pradesh in 2003. Cultivation in easily accessible areas of Mizoram and Manipur was successfully eliminated in the early and mid-1990s, although poppy cultivation is experiencing a recent revival in Manipur, according to CBN officials. The bulk of India's illicit cultivation is now confined to Arunachal Pradesh, the most remote of northeastern states, which has no airfields and few roads. The terrain is mountainous, isolated jungle, requiring significant commodity and personnel resources. The need to combat the many insurgencies in the Northeast states has limited the number of personnel available for such time-consuming, labor-intensive campaigns and the GOI was unable to conduct such a campaign in 2003.
The CBN, however, is concerned that illicit opium production is rising, with an increasing percentage used for commercial purposes, for sale locally or to heroin producers across the Burma border. Current rough estimates by the local drug control officials put opium cultivation in Arunachal Pradesh at 1,500 to 2,000 hectares. There are no accurate estimates of opium gum yields, but CBN officials claim that the yields from illicit production in Arunachal Pradesh are very low--between two to six kilograms per hectare.
Drug Flow/Transit. Although trafficking patterns appear to be changing, India historically has been an important transit area for Southwest Asia heroin from Afghanistan and Pakistan and, to a lesser degree, from Southeast Asia--Burma, Thailand, and Laos. India's heroin seizures from these two regions continue to provide evidence of India's transshipment role. Most heroin transiting India appears bound for Europe. Seizures of Southwest Asian heroin made at New Delhi and Mumbai airports tend to reinforce this assessment. Increasingly significant seizures in Southern India, particularly in Tamil Nadu, confirm that smuggling of heroin from India to Sri Lanka continues unabated.
Trafficking groups operating in India fall into four categories: West African traffickers and trafficking groups; traffickers who maintain familial and/or tribal ties to Pakistan and Afghanistan; ethnic Tamil traffickers, centered primarily in Southern India, who are alleged to be involved in trafficking between India and Sri Lanka; and indigenous tribal groups in the northeastern states adjacent to Burma who maintain ties to Burmese trafficking organizations.
Indian-produced methalqualone (mandrax) trafficking to Southern and Eastern Africa continues. Although South Africa has increased methalqualone production, India is still believed to be among the world's largest known clandestine methalqualone producers. Seizures of methalqualone, which is trafficked in both pill and bulk form have varied significantly, from a high of 11,130 kilograms in 2002 to a low of 195 kilograms through September 2003. Cannabis smuggled from Nepal is mainly consumed within India, but some makes its way to western destinations.
Domestic Programs (Demand Reduction). Newspapers frequently refer to Ecstasy and cocaine use on the Mumbai and New Delhi "party circuit," but there is no information on the extent of their use. While "brown sugar" and cannabis remain India's principal recreational drugs, intravenous drug use (IDU) of pharmaceutical opiates is rising in India, replacing to a large extent injectible heroin. Various licitly produced opiate pain killers, cough medicines, and codeine are just some of the substances that have emerged as the new drugs of choice. A recent study found that licit opiate abuse accounted for 43 percent of drug abuse. According to the study, drug users are largely young and predominantly male. More than a quarter are homeless, nearly half are unmarried, and 40 percent had less than a primary school education. Itinerant populations (e.g., truck drivers) are extremely susceptible to drug use. The number of women drug abusers is increasing rapidly. Most women IDUs exchange sex for drugs; many are commercial sex workers. Frequently, their children become drug users. India has just one residential treatment program for women IDUs. Widespread needle sharing has led to high rates of HIV/AIDS and overdoses.
The popularity of injecting licitly available medicines can be attributed to four factors. First, they are far less expensive than their illegal counterparts. Second, they provide quick, intense "highs" that many users prefer to the slower, longer-lasting highs resulting from heroin. Third, many IDUs believe that they experience fewer and milder withdrawal symptoms with pharmaceutical drug use. Finally, licit opiate pharmaceuticals are widely available and easy to obtain, since virtually any drug retail outlet will sell them without a prescription.
Because licit opiate pharmaceutical drugs produce shorter periods of intoxication, users must inject them more often, leading to more opportunities to spread diseases associated with IDU, such as HIV/AIDS and hepatitis. It is not uncommon for IDUs to share needles with as many as eight to 15 people a day. Estimates of HIV/AIDS prevalence among injecting drug users by India's National AIDS Control Organization and by NGOs range from 39 percent in the Northeast to 15 percent in Chennai to 40 percent in New Delhi. The MSJE/UNODC study found that intravenous drug users often engaged in unprotected sexual intercourse, often with sex workers.
The GOI is promoting greater community participation and reaching out to high-risk population groups with an on-going community-based program for prevention, treatment and rehabilitation through some 400 NGOs throughout the country.
Bilateral Cooperation. The United States has a close and cooperative relationship with the GOI on counternarcotics issues. In September 2003, the United States and India signed Letter of Agreement amendments to provide State Department drug assistance funding worth $2.184 million for counternarcotics law enforcement. A separate grant of $50,000 directly to NGO Navjyoti funds a drug rehabilitation project to train medical personnel to treat drug abusers and to provide community-based prevention services to slum areas, which have the highest rates of drug abuse in New Delhi.
The Letter of Agreement amendments will enhance the drug enforcement capacities of India's three major drug law enforcement agencies: NCB, CBN and Customs. The projects will provide equipment and training to help NCB, Customs and CBN to interdict illicit trafficked drugs and precursor chemicals and to help CBN better regulate the licit opium crop and eradicate illicit opium. Several projects focus on providing assistance to India's Northeast. Cooperation between the DEA and Indian drug enforcement authorities is expanding, particularly in investigations into precursor chemicals smuggled from India to key drug production areas.
The Road Ahead. The GOI has tightened controls over licit opium cultivation. Establishment of the U.S. Customs Office in New Delhi has opened up another important avenue of communication and cooperation on drug and transnational crime cases. The Ministry of Finance, the GOI lead for policy on drug control, is more actively shaping and coordinating drug and licit opium control strategies among India's various drug enforcement agencies and will take the lead in developing India's Financial Intelligence Unit to combat money laundering.
While the Finance Ministry will continue to coordinate counternarcotics cooperation, NCB's move to the Ministry of Home Affairs, will enhance the U.S. relationship with the Ministry's training division as well, in particular by streamlining law enforcement training to India's police and to the NCB. The GOI says it is increasingly concerned over the nexus between drug trafficking and terrorism. The GOI has recognized the need for stronger drug control efforts nationally, particularly in the Northeast. The United States will continue to explore opportunities to work with the GOI in addressing drug trafficking and production and other transnational crimes of common concern.
India's large and fairly advanced chemical industry manufactures a wide variety of chemicals, including ephedrine, pseudoephedrine and acetic anhydride, sought for amphetamine, methamphetamine and heroin manufacture in Burma and heroin manufacture in Afghanistan. There is also evidence that some acetic anhydride is being diverted to domestic heroin manufacture.
India is a party to the 1988 UN Drug Convention, but it does not have controls on all the chemicals listed in the Convention. There are controls on the Indian-produced chemicals most likely to be diverted, ephedrine, pseudoephedrine, acetic anhydride, and N-acetylanthranilic acid, chemicals listed in the convention. Indian law allows the government to place other chemicals under control. The list is reviewed and updated annually. In February 2003, the government added anthranilic acid to the list of controlled chemicals, since it has been found in the manufacture of methaqualone (Mandrax).
The Indian Chemical Manufacturing Association, in cooperation with the government, has implemented strict controls on acetic anhydride. Chemical manufacturers visit customers to verify the legitimacy of their requirements, and shipments are monitored to prevent diversion. Domestic and export sales of acetic anhydride require a letter of no objection from the government.
Indian authorities are very cooperative with the U.S. on letters of no objection and verification of end-users, especially with regard to ephedrine and pseudoephedrine. Information is shared between Indian and U.S. authorities and India is a participant in Operations Purple and Topaz and Project Prism. India co-chairs the steering committee for Operation Topaz.
DEA has a Diversion Investigator assigned to its New Delhi office.
As a growing regional financial center, India is vulnerable to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion. However, India's historically strict foreign-exchange laws, transaction reporting requirements, and banking industry's know-your-customer policy make it difficult for criminals to use banks or other financial institutions to launder money. Rather, large portions of illegal proceeds are laundered through the alternative remittance system called "hawala" or "hundi" (estimated to account for up to 30 percent of India's GNP). Under this system, individuals transfer funds or other items of value from one country to another, often without the actual movement of currency. The system provides anonymity and security; permits individuals to convert currency into other currencies; and lets them convert narcotics, gold, or trade items into currency. In addition, many individuals are suspicious of banks and prefer to avoid the lengthy paperwork required to complete a money transfer through a financial institution. Hawala dealers can provide the same service with little or no documentation and at rates less than that charged by banks.
Historically, gold has been one of the most important instruments involved in Indian hawala transactions. There is a widespread cultural demand for gold in the region. (India liberalized its gold trade restrictions in the mid-1990s). In recent years, it is believed that the growing the Indian diamond trade has also been increasingly important in providing countervaluation or a method of "balancing the books" in external hawala transactions. Invoice manipulation, for example, inaccurately reflecting the value of a good sold on the invoice, is also pervasive and is used extensively to both avoid customs duties and taxes and launder illicit proceeds through trade-based money laundering.
Perhaps the largest source of money laundering activity in India is income tax evasion. Changes in the tax system are gradually being implemented, as the Government of India (GOI) now requires individuals to use a personal identification number to pay taxes, purchase foreign exchange, and apply for passports. However, tax evasion remains widespread.
The Criminal Law Amendment Ordinance allows for the attachment and forfeiture of money or property obtained through bribery, criminal breach of trust, corruption, or theft and of assets that are disproportionate to an individual's known sources of income. The 1973 Code of Criminal Procedure, Chapter XXXIV (Sections 451-459), establishes India's basic framework for confiscating illegal proceeds. The Narcotic Drugs and Psychotropic Substances Act (NDPS) of 1985, as amended in 2000, calls for the tracing and forfeiture of assets that have been acquired through narcotics trafficking, and prohibits attempts to transfer and conceal those assets. However, punishment under NDPS is minimal and no cases have been prosecuted to date. In 2002, the last year for which statistics are available, the Narcotics Control Bureau froze assets of about $104,000; about $262,000 was forfeited pursuant to the NDPS, although there still have not been any prosecutions.
The Foreign Exchange Management Act (FEMA), which was enacted in 2000, is one of the GOI's primary tools for fighting money laundering. Like its predecessor, the Foreign Exchange Regulation Act, the FEMA's objectives include the establishment of controls over foreign exchange, the prevention of capital flight, and the maintenance of external solvency. FEMA also imposes fines on unlicensed foreign exchange dealers. A closely related piece of legislation is the Conservation of Foreign Exchange and Prevention of Smuggling Act (COFEPOSA), which provides for preventive detention in smuggling and other matters relating to foreign exchange violations. The Ministry of Finance's Enforcement Directorate enforces FEMA and COFRPOSA.
The Reserve Bank of India (RBI), India's Central Bank, plays an active role in the regulation and supervision of foreign exchange transactions. Hawala can also be synonymous with foreign exchange. Although hawala is widespread in India, hawala transactions continue to be illegal. In response to questions from U.S. Treasury officials in November 2003 about the possibility of having hawala dealers register, as has been the case in some neighboring jurisdictions, Indian Ministry of Finance (MOF) officials said they have no plans to do so. RBI has become more receptive to anti-money laundering initiatives, especially those related to terrorist financing, and in 2002 set up a special unit to provide anti-money laundering guidance to the Ministry of Finance (MOF). RBI worked with the police in the state of Kashmir to provide financial information in relation to a fraud case. Also in 2002, the Government of India (GOI) formed a high-level interministerial group to coordinate all anti-money laundering and terrorist financing issues. The group includes representatives from the regulatory, law enforcement, and intelligence communities.
On November 27, 2002, the lower house of Parliament finally passed the Prevention of Money Laundering Bill, which had first been introduced in 1998. The bill was amended in August 2002 by the upper house to include terrorist financing provisions. India's President signed the law in January, 2003. This legislation criminalizes money laundering, establishes fines and sentences for money laundering offenses, imposes reporting and record keeping requirements on financial institutions, provides for the seizure and confiscation of criminal proceeds, and creates a financial intelligence unit (FIU) that will be part of the MOF. However, MOF officials note that the law does not, significantly, list tax evasion as a predicate offense. A series of implementing rules and regulations to the law will be finalized in early 2004.
Many banking institutions have taken steps on their own to combat money laundering. Each bank has compliance officers to ensure that existing anti-money laundering regulations are observed. The RBI issued a notice in 2002 to commercial banks instructing them to adopt the know-your-customer rule. The Indian Bankers Association established a working group to develop self-regulatory anti-money laundering procedures. Foreign customers applying for accounts in India must show positive proof of identity when opening a bank account. Banks also require that the source of funds must be declared if the deposit is more than the equivalent of $10,000. Finally, banks have the authority to freeze assets in accounts when there is suspicious activity.
The new FIU is scheduled to become operational in January 2004. The FIU will be an independent unit located within the MOF's Central Economic Intelligence Bureau. Its initial staff of about 50 people will come from various government ministries, including the security agencies, RBI, Customs, Inland Revenue, and the private sector. Top management will come from the MOF's revenue department. It will be an analytical unit and will not have investigative powers.
Until the new FIU becomes fully operational, the Central Economic Intelligence Unit (CEIB) will continue to serve as the GOI's lead organization for fighting financial crime; it already receives suspicious transaction reports, of which, according to GOI officials in November 2003, there is a backlog. The Central Bureau of Investigation is also active in anti-money laundering efforts and hawala investigations. Other organizations such as the Directorate of Revenue Intelligence, Customs and Excise, the RBI, and the MOF are active in anti-money laundering efforts.
India does not have an offshore financial center but does license offshore banking units (OBUs). These OBUs are required to be " . . . predominantly owned by individuals of Indian nationality or origin resident outside India and include overseas companies, partnership firms, societies and other corporate bodies which are owned, directly or indirectly, to the extent of at least 60 percent by individuals of Indian nationality or origin resident outside India as also overseas trusts in which at least 60 percent of the beneficial interest is irrevocably held by such persons." OBUs must also be audited to affirm that ownership by a nonresident Indian is not less than 60 percent. These entities are susceptible to money laundering activities, in part because of a lack of stringent monitoring of transactions. Finally, OBUs must be audited financially, but the firm that does the auditing does not have to have government approval.
India is a party to the 1988 UN Drug Convention, and is a member of the Asia/Pacific Group on Money Laundering. It is a signatory to but has not yet ratified the UN Convention against Transnational Organized Crime. In October 2001, India and the United States signed a mutual legal assistance treaty, which the U.S. Senate ratified in November 2002. India took steps in 2003 to move towards ratification of the treaty. The Cabinet Committee on Security will make the formal decision on ratification, which is expected in early 2004. India has also signed a police and security cooperation protocol with Turkey, which among other things provides for joint efforts to combat money laundering. An evaluation team from the FATF was scheduled to visit India during the second half of December 2003, preparatory to India's joining that organization. The nascent FIU, after it becomes operational, will seek to join the Egmont Group.
India became a party to the UN International Convention for the Suppression of the Financing of Terrorism in April 2003. The Government of India maintains tight controls over charities, which are required to register with the RBI. In April 2002, the Indian Parliament passed the Prevention of Terrorism Act (POTA), which criminalizes terrorist financing. In March 2003, the GOI announced that it had charged 32 terrorist groups under POTA and had notified three others that they were involved in what were considered illegal activities. In July 2003, the GOI announced that it had arrested 702 persons under POTA. Terrorism financing in India, as well as the entire sub-continent, is directly linked to the use of hawala.
India should cooperate fully with international initiatives to provide increased transparency in hawala, and, if necessary, should increase law enforcement actions in this area. Indian involvement in the underworld of the international diamond trade should be examined. India should pursue its efforts to join the FATF. It also needs to quickly finalize the implementing regulations to the anti-money laundering law and bring the new FIU up to speed in order to enhance information sharing with its counterparts around the world. Meaningful tax reform will also assist in negating the popularity of hawala and lessen money laundering. Increased enforcement action should also be taken to combat invoice manipulation and trade-based money laundering.