Source: 2005
Released by the Bureau for International Narcotics and Law Enforcement Affairs
I. Summary
India is the only country authorized by the international community to produce opium gum for pharmaceutical use, rather than concentrate of poppy straw (CPS), the processing method used by the other producers of opiate raw material. India's strategic location, between Southeast and Southwest Asia, the two main sources of illicit opium, make it a heroin transshipment area. The northwestern state of Himachal Pradesh increasingly appears to be a center for cultivation and international trafficking of hashish, although most cannabis and hashish trafficked in India is smuggled from Nepal for export. India produces heroin from diverted licit opium for both the domestic addict market and is a modest, but growing, producer of heroin destined for the international market. In the past two years, Indian law enforcement authorities have dismantled two major laboratories --- one set to produce methamphetamines and the other, Ecstasy. The Government of India (GOI) formally released the results of the 2001 National Drug Study (NDS) conducted in partnership with UNODC in 2004. Injecting drug use (IDU) of heroin, morphine base (brown heroin) and opiate pharmaceuticals continues to grow, while major metropolitan areas increasingly report the use of cocaine, Ecstasy and other chemical drugs among the wealthy elite.
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 and 2003, the GOI and the United States conducted a Joint Licit Opium Poppy Survey (JLOPPS) to develop a methodology to estimate opium gum yield. The survey results confirmed the validity of the survey's yield prediction methodology, but lacked key data to apply the study's conclusions directly to India's 2002/03 licit opium crop. The data revealed that several widely used Indian poppy varieties have a low alkaloid yield.
India's large and fairly advanced chemical industry manufactures a wide range of chemicals, including the precursor chemicals acetic anhydride (AA), ephedrine and pseudoephedrine and other chemicals, which can be diverted for the manufacture of illicit narcotics. The GOI controls potential dual use chemicals, including the precursor chemicals AA and pseudoephedrine. Some chemicals are controlled both for import and export, while others are controlled only for import or for export. Violation of any order regulating controlled substance precursors is an offence under the Narcotics Drugs and Psychotropic Substances Act (NDPSA), the GOI's key law controlling drug trafficking, and punishable with imprisonment of up to 10 years. Intentional diversion of any substance (whether it is notified or not as a controlled substance) for illicit manufacture of narcotic drugs and psychotropic substances is also punishable under the NDPSA.
The GOI, in partnership with the Indian Chemical Manufacturing Association, imposes strict access controls on AA, a chemical used to process opium into heroin. These controls include specially fabricated sealing systems, which make it very difficult to tamper with the tankers' inlets and outlets, end-use certificates from the buyers, and special identity cards for drivers driving tankers containing AA. The GOI reviews its chemical controls annually and updates its list of "controlled substances" as necessary. India is a party to the 1988 UN Drug Convention.
II. Status of Country
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. Opium stocks now exceed minimum requirements, almost tripling between 1999 and 2003, from a stock of 509 metric tons (MT) in 1999/2000 TO 1,386 metric tons in 2003/04.
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) that specifies the number of kilos of opium to be produced per hectare (HA) per state. The MQY is established yearly 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 they produce 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 to compare cultivation in similar geo-climatic zones to estimate potential crop yields, assess storm damage and determine whether opium was being diverted. The satellite results were then confirmed by on-ground CBN visits that measured each farmer's plot size.
In 2004, CBN again tightened its controls against diversion, conducting 100 percent measurement of each cultivated area. The measurements were cross-checked by supervisory officers. Any cultivation in excess of five percent of the allotted cultivation area was not only uprooted, but the cultivator was also 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 has also reduced the total procurement period of opium in order to minimize opportunities for diversion and deployed additional teams of officers from the Central Excise Department to monitor harvesting and check diversion.
The newest CBN administrative innovation is a project to issue microprocessor chip-based cards (Smart Identity Cards) to opium poppy cultivators. The card carries the personal details of the cultivator, the licensed area, the measured/test measured field area and the opium tendered by him to the CBN. The card can also store previous years' data. The information stored on the card is read with handheld terminal/read-write machines that will be provided to field divisions as part of the project. CBN personnel will enter cultivation data into the cultivators' cards and the data will be uploaded to be transferred to computers at CBN HQs and regional offices. The cards were delivered to cultivators at the time of licensing. CBN has established a model center to begin implementing the project in Rajasthan before deciding whether to carry it out in all other production areas.
The CBN also 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 per kilo of 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 receive a premium, but premium prices can only act as a modest positive incentive. For the 2004/2005 opium harvest year, CBN has drastically lowered the number of hectares licensed (from 21,141 in 2003/2004 to 8,771 in 2004/2005) and the number of farmers licensed (from 105,697 in 2003/2004 to 87,682 in 2004/2005).
Although there is no reliable estimate of diversion from India's licit opium industry, clearly, some diversion does take place. However, it is not possible to pinpoint the amount accurately and there is no evidence that opium or its derivatives diverted from India's fields reaches the U.S. In 2004, the GOI discovered and shut down six morphine base laboratories in India's opium growing areas; four in Uttar Pradesh and two in Madhya Pradesh.
Poppies harvested using CPS are not lanced, and since the dried poppy heads cannot be readily converted into a usable narcotics substance, diversion opportunities are minimal. However, it is inherently difficult to control diversion of opium gum collection because opium gum is collected by hand-scraping the poppy capsule and the gum is later consolidated before collection. The sheer numbers of Indian farmers, farm workers and others (over one million yearly) who come into contact with 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 narcoticsraw materials using the CPS process. The GOI believes the labor intensive gum process used in India is appropriate to the large numbers of relatively small-scale farmers who grow poppy in India.
Processing opium gum is difficult because a residue remains after the narcotic alkaloids have been extracted, which must be disposed of with appropriate environmental safeguards. Because of this, pharmaceutical opiate processing companies prefer using concentrate of poppy straw (CPS) for ease of extracting the opiate alkaloids.
To meet this challenge, the GOI is exploring the possibility of converting some of its opium crop to the CPS method. In 2003, the Ministry of Finance visited several countries that produce CPS to observe CPS extraction methods. The GOI is also examining ways to expand India's opiate pharmaceutical processing industry and the availability of opiate pharmaceutical drugs to Indian consumers through ventures with the private sector. The GOI has invited major Indian pharmaceutical producers to submit proposals that would essentially privatize opium refining and pharmaceutical opiate production.
However, regardless of the GOI's interest in CPS, the financial and social costs of the transfer and the difficulty of purchasing an 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 for licit opium sales.
Morphine base ("brown heroin" heroin) is India's most popularly abused heroin derivative, either through smoking, ("chasing", i.e., inhaling the fumes) or injecting. Most of India's "brown heroin" comes from diverted licit Indian opium and is locally manufactured. Indian "brown heroin" heroin is also increasingly available in Nepal, Bangladesh, Sri Lanka, and the Maldives. Since January 1999, Indian authorities have seized increasing amounts of domestically refined ("white") heroin, which has constituted as much as 80 percent of India's heroin seizures over the past year. Most seized "white" heroin is destined for West Africa and Europe. Heroin seizures on the India/Pakistan border, which had plummeted during the past few years due to the Indian/Pakistani border tensions, appear to be on the upswing.
III. Country Actions Against Drugs in 2004
Policy Initiatives. India's stringent Narcotic Drugs and Psychotropic Substances Act (NDPSA) of 1985 was amended in October, 2001, bringing significant flexibility to the Indian sentencing structure for narcotics offenses. The amendments 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 NDPSA also made it more likely that drug traffickers would be refused bail, particularly those serious offenders who are more likely to flee before trial. Amendment of India's sentencing laws for drugs is expected to increase the conviction rate significantly for future violators. In 2003, 8,790 persons were prosecuted, resulting in 3,330 convictions for a conviction rate of 38 percent. For the first 3 quarters of 2004, 4,346 people were prosecuted for drug-related offences, of which 2,224 were convicted. In certain cases involving repeat offenders, who are dealing in commercial quantities of illegal drugs, the law allows for the death penalty. It should be noted that to date, no person has been given the death penalty for drug trafficking in India.
In April, 2003, GOI moved the NCB from 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 has enhanced the NCB's law enforcement capabilities and helped 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, such as increasing NCB'S staff and increasing the technical capacities of the NCB's officers.
Accomplishments. 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.
Law Enforcement Efforts. The GOI's decision to fence the India/Pakistan border, while not specifically designed to control drug trafficking, has effectively done so, leading to a drop in the amount of Afghan heroin trafficked through that border. Through October 2004, Indian law enforcement authorities seized 856 kilograms of heroin in 2,087 cases. The majority of this heroin was seized in South India. Indian law enforcement agencies also seized 1,616 kilograms of opium in 451 cases, 4,012 kilograms of hashish in 883 cases and 49 kilograms of morphine base in 137 cases. While hashish and marijuana seizures have increased from last year's seizures, other drug seizures, with the exception of opium, appear to be below last year's seizures. Cocaine seizures, while small, have doubled (from 1 kilogram to 2 kilograms) confirming what news reports and law enforcement agencies have said for several years, that cocaine is available in India on the wealthy "party circuit," particularly in Mumbai and New Delhi.
Seizures of controlled substance pharmaceutical drugs are also up sharply. In 2003, law enforcement authorities in the states of Nagaland and Assam seized almost 104,087 tablets of diverted Proxyvan, a licit opiate pharmaceutical widely used in Northeast India. In 2003, Indian law enforcement authorities also seized 10.3 kilograms of diazepam in addition to 74,320 ampoules of diverted buprenorphine, a synthetic opiate widely used by injecting drug users throughout India, particularly in Chennai, New Delhi and North India. Diverted Indian licit controlled pharmaceuticals have also been seized in the Gulf countries, in Afghanistan and in Bangladesh. The GOI does not maintain comprehensive, nationwide statistics on controlled pharmaceutical substance seizures.
On June 2004 the Indian Directorate of Revenue Intelligence (DRI) arrested five individuals who were involved in a poly-drug trafficking organization. In conjunction with the arrest, 350,000 tablets of MDMA (Ecstasy), 8 kilograms of amphetamine and 1.2 tons of Mandrax (methaqulone) were seized. This was the first significant seizure of MDMA in India. In addition, the investigation revealed that the MDMA was produced by the co-conspirators in India. The DRI believes, and DEA agrees, that the MDMA was intended for markets outside of India. The main target in this investigation was previously arrested by DEA in the United States on a drug trafficking case.
DEA New Delhi, in conjunction with NCB, has initiated a number of internet pharmaceutical cases with a nexus to the United States. The cases center around on-line prescriptions being obtained by U.S.-based customers from India in violation of Indian and U.S. laws. Large amounts of pharmaceuticals have been seized in India that were destined for the United States. The investigation has revealed that the individuals operating the on-line pharmacy are generating hundreds of thousands, or even millions of dollars, in revenues. DHS and Indian Customs are working in coordination with DEA and NCB to investigate the use of courier mail to ship diverted licit pharmaceuticals from India to the U.S.
Corruption. The Indian media regularly report 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 (MLAT) on October 17, 2001, which was ratified by the U.S. Senate, but is awaiting GOI ratification. The change of government in May caused a delay in GOI consideration of the MLAT, but MEA sources indicate the treaty could be ratified soon. An extradition treaty is in effect between the U.S. and India. India has signed but has not yet ratified the UN Convention against Transnational Organized Crime. The USG and the GOI signed the long-awaited Customs Mutual Assistance Agreement on December 15, 2004.
Illicit Cultivation/Production. 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. For those reasons, the GOI has not conducted any major poppy eradication campaigns in the Northeast in the past two years, although 417 acres of illicit poppy plant was destroyed in 2004. Current very rough estimates by the local drug control officials put opium cultivation in Arunachal Pradesh at 1,500 to 2,000 hectares, but there have not been any official GOI illicit crop surveys for over two years. 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. However, the bulk of heroin seized in the past two years has been of domestic origin (NCB estimates 80 percent), seized in South India and apparently destined to Sri Lanka. Trafficking groups operating in India fall into four categories. Most small seizures at the Mumbai and New Delhi international airports are from West African traffickers. Traffickers who maintain familial and/or tribal ties to Pakistan and Afghanistan are responsible for most of the smuggling of Pakistani or Afghan heroin into India. Ethnic Tamil traffickers, centered primarily in Southern India, are alleged to be involved in trafficking between India and Sri Lanka. Indigenous tribal groups in the northeastern states adjacent to Burma maintain ties to Burmese trafficking organizations and facilitate the entry into Burma of precursor chemicals and into India of refined "white sugar" heroin through the porous Indo/Burma border.
Indian-produced methaqualone (Mandrax) trafficking to Southern and Eastern Africa continues. Although South Africa has increased methaqualone 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 1,614 kilograms through September 2004. Cannabis smuggled from Nepal is mainly consumed within India, but some makes its way to western destinations. Interestingly, there was also a very large Mandrax seizure (18 metric tons) in China. The drugs appeared to be destined for the South African market.
India is also increasingly emerging as a manufacturer and supplier of licit opiate/psychotropic pharmaceuticals (LOPPS), both organic and synthetic, to the Middle East, Pakistan and Afghanistan. Some of the LOPPS are licitly manufactured and then diverted, often in bulk. Some of the LOPPS are illicitly manufactured as well. Indian-origin LOPPS and other controlled pharmaceutical substances are increasingly being shipped to the U.S. in multiple small quantities, making detection very difficult.
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 smoking "brown heroin" (morphine base) and cannabis remain India's principal recreational drugs, intravenous drug use (IDU) of LOPPS is rising in India, replacing, almost completely, "white" heroin. In parts of India where IDUs have been denied access to LOPPS, IDUs have turned to injecting "brown heroin." Drug users in Mumbai have discovered that injecting "brown heroin" is much cheaper than "chasing)," leading to an explosion of "brown heroin" IDU in Mumbai. Various licitly produced psychotropic drugs and opiate pain killers, cough medicines, and codeine are just some of the substances that have emerged as the new drugs of choice. In 2004, the Ministry of Social Justice and Empowerment (MSJE) formally released what is likely the world's largest drug abuse study, conducted in partnership with UNODC in 2001. The previous government had embargoed the study. The study found that licit opiate abuse accounted for 43 percent of Indian drug abuse. According to the study, drug users are largely young and predominantly male. Although drug abuse cuts across a wide spectrum of India's society, more than a quarter of drug abusers 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. A new residential treatment program for women IDUs opened in New Delhi in 2004, so that India now has two residential treatment programs for women IDUs. Widespread needle sharing has led to high rates of HIV/AIDS and overdoses.
The popularity of injecting controlled licit pharmaceuticals can be attributed to four factors. First, they are far less expensive than their illegal counterparts. Refined heroin on the illicit market can cost as much as $2 a dose, while LOPPS usually cost fewer than 40 cents a dose. 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/psychotropic pharmaceuticals are widely available and easy to obtain, since virtually any drug retail outlet will sell them without a prescription.
Because LOPPS produces 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 and other drug paraphernalia 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's Ministry of Social Justice and Empowerment (MSJE) has a three-pronged strategy for demand reduction, consisting of building awareness and educating people about drug abuse, dealing with addicts through programs of motivational counseling, treatment, follow-up and social reintegration and training volunteers to work in the field of demand reduction. The MSJE's goal is to promote greater community participation and reach 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. The MSJE spent about $5 million on NGO support last year.
IV. U.S. Policy Initiatives and Programs
Bilateral Cooperation. The United States has a close and cooperative relationship with the GOI on counternarcotics issues. On December 15, 2004, the long-awaited Customs Mutual Assistance Agreement was signed. In September 2003, the United States and India signed Letter of Agreement (LOA) amendments to provide State Department drug assistance funding worth $2.184 million for counternarcotics law enforcement. In 2004, another $40,000 was added to the LOA. A separate grant of $50,000 directly to NGO Navjyoti of the Delhi Police Foundation 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 Road Ahead. The GOI continues to tighten controls over licit opium cultivation. The NCB's move to the Ministry of Home Affairs has enhanced the U.S. relationship with the Ministry and NCB. DEA gave more courses to more law enforcement officials from a wider variety of state and central government law enforcement agencies in 2004 than ever before. The Intelligence Infrastructure Enhancement Project training on link analysis software will yield results in better targeting of drug traffickers and closer cooperation with DEA. 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 chemical industry manufactures a wide range of chemicals, including the precursor chemicals acetic anhydride, ephedrine, pseudoephedrine, which can be diverted for illicit drug 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. The GOI controls acetic anhydride, N-acetylanthranilic acid, anthranilic acid, ephedrine, pseudoephedrine, potassium permanganate, ergotamine, 3,4-methylenedioxyphenyl-2-propanone, 1-phenyl-2propanone, piperonal, and methyl ethyl ketone, all chemicals listed in the convention. Indian law allows the government to place other chemicals under control. Violation of any order regulating controlled substance precursors is an offense under the Narcotics Drugs and Psychotropic Substances Act, the key law controlling trafficking and is punishable with imprisonment of up to ten years. Intentional diversion of any substance, whether controlled or not, to illicit drug manufacture is also punishable under the act.
The Indian Government in partnership with the Indian Chemical Manufacturing Association imposes controls on acetic anhydride, a key heroin chemical. Chemical manufacturers visit customers to verify the legitimacy of their requirements, and shipments are secured with specially fabricated sealing systems to prevent diversion. Domestic and export sales of acetic anhydride require a letter of no objection from the government.
Indian authorities cooperate with U.S. authorities 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.
India,s status as a growing regional financial center, the existence of a large system of informal cross-border money flows (hawala), and widely perceived tax avoidance make India vulnerable to money laundering activities. India is a major drug-transit country. 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.
India,s historically strict foreign-exchange laws, transaction reporting requirements, and the banking industry,s know-your-customer policy make it difficult for criminals to use banks or other financial institutions to launder money. Large portions of illegal proceeds are accordingly laundered through the alternative remittance system called "hawala" or "hundi." The hawala market is estimated at anywhere between 20 and 50 percent of the formal market. Remittances to India reported through legal, formal channels in 2003-2004 amounted to $18 billion.
Under the hawala system, individuals transfer funds or other items of value from one country to another, often without the actual movement of currency. Among its advantages, the system: provides anonymity and security; permits individuals to convert one currency into another; and lets them convert narcotics, gold, or trade items into currency. Anecdotal evidence suggests that many Indians do not trust 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 those charged by banks. The Government of India (GOI) neither regulates hawala dealers nor requires them to register with the government; the Reserve Bank of India (RBI), the country,s Central Bank, argues that hawala dealers cannot be registered or regulated because the system (though widespread) is illegal. The RBI does intend to increase its regulation of non-bank money transfer operations such as currency exchange kiosks and wire transfer services.
Historically, gold has been one of the most important commodities 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 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 pervasive and is used extensively to both avoid customs duties and taxes and to launder illicit proceeds through trade-based money laundering.
Tax evasion is also widespread. Changes in the tax system are gradually being implemented, as the GOI now requires individuals to use a personal identification number to pay taxes, purchase foreign exchange, and apply for passports. The GOI plans to introduce a nation-wide value added tax in 2005. Such a tax would replace a basket of complicated state sales taxes and excise taxes, thus reducing the incentive and opportunities for businesses to conceal their sales or income levels.
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 disproportionately large in comparison 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. The Smugglers and Foreign Exchange Manipulators Act (SAFEMA) also allows the seizure and forfeiture of assets linked to Customs Act violations. The competent authority (CA), located in the Ministry of Finance (MOF), administers both the NDPSA and SAFEMA.
The 2001 amendments to the NDPSA allow the CA to immediately seize any asset owned or used by a narcotics trafficker upon arrest; previously, assets could be seized only after conviction. However, Indian law enforcement officers lack training in the procedures for identifying individuals who might be subject to asset seizure/forfeiture, and in tracing assets to be seized. They also need training in drafting and expeditiously implementing asset freezing orders. The Foreign Exchange Management Act (FEMA), which was enacted in 2000, is one of the GOI,s primary tools for fighting money laundering. 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 RBI also plays an active role in the regulation and supervision of foreign exchange transactions.
On November 27, 2002, the lower house of Parliament finally passed the Prevention of Money Laundering Act (PMLA), 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 provides for the creation of a Financial Intelligence Unit (FIU). However, the implementing rules and regulations for the PMLA had not been promulgated as of the end of December 2004.
In November 2004, the Indian Cabinet gave its approval for setting up the FIU, which will be an independent unit within the MOF,s Central Economic Intelligence Bureau (CEIB). The FIU is expected to become operational in early 2005 and will reportedly have both intelligence and investigative wings. India,s new FIU will seek to join the Egmont Group. Until the new FIU becomes fully operational, the CEIB will continue to serve as the GOI,s leading organization for fighting financial crime. In this capacity, it receives suspicious transactions reports, of which there is a backlog, according to GOI officials in late 2003. The Central Bureau of Investigation, the Directorate of Revenue Intelligence, Customs, and Excise, the RBI, the Competent Authority, and the MOF are also active in anti-money laundering efforts. In 2004, the Directorate of Revenue Intelligence (DRI) referred four hawala-based money laundering cases with a U.S. nexus to the U.S. Department of Homeland Security/Immigration and Customs Enforcement.Many banking institutions, prompted by the RBI, have taken steps on their own to combat money laundering. Many banks have 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 must report suspicious transactions. The GOI has the power to order banks to freeze assets. In November 2004, the RBI issued a circular updating its know-your-customer guidelines to ensure that they comply with all Financial Action Task Force (FATF) recommendations. The RBI has asked all commercial banks to become FATF-compliant for existing as well as new accounts by December 2005. The guidelines include the requirement that banks identify politically connected account holders residing outside India and identify the source of funds before accepting deposits from these individuals. The RBI has placed politically exposed persons (those entrusted with prominent public functions in other countries) in the highest risk category for the commission of financial crimes.
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. 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 in which they are involved. 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. India became a party to the UN International Convention for the Suppression of the Financing of Terrorism in April 2003. 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; ratification was expected in early 2004 but has been delayed. India has also signed a police and security cooperation protocol with Turkey, which among other things provides for joint efforts to combat money laundering.
The GOI 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 the 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 the POTA. In November 2004, the Parliament repealed the POTA and amended the 1967 Unlawful Activities (Prevention) Act to include the POTA,s salient elements, including the criminalization of terrorist financing and the legal definitions for terrorism and terrorist acts. A GOI/POTA review committee will have one year to review all 333 pending POTA cases, after which time any case that is not resolved will be dismissed.
Terrorist financing in India, as well as in much of the subcontinent, is linked to the hawala system. The Government of 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 citizens, involvement in the underworld of the international diamond trade should be examined. India should pursue efforts to join the FATF. It also needs to quickly finalize the implementing regulations to the anti-money laundering law and establish the new FIU 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. India should ratify the UN Convention against Transnational Organized Crime.