Source: 2006
Released by the Bureau for International Narcotics and Law Enforcement Affairs
I. Summary
India is the only country authorized by the International Narcotics Control Board (INCB) to produce opium gum for pharmaceutical use, rather than from concentrate of poppy straw (CPS), the processing method used by the other producers of licit opiate raw materials. This matters, as gum opium is intrinsically easier to divert to illicit uses, but India does a commendable job to avoid diversion. India's strategic location, between Southeast and Southwest Asia, the two main sources of illicit opium, make it a heroin transshipment area. Over the last several years, the northwestern state of Himachal Pradesh has seen an increase in illegal drug trafficking activities, including international hashish trafficking and illicit opium cultivation. Much of the hashish and cannabis intended for international markets is smuggled into India from Nepal. India produces heroin from diverted licit opium for its own illicit domestic addict market; India is also a modest but growing producer of entirely illicit heroin destined for the international market. In the past two years, Indian law enforcement authorities have dismantled two major laboratories -- one set to produce methamphetamine in Calcutta and the other, ecstasy, in Mumbai. 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 sugar" heroin) and opiate pharmaceuticals continues to be a concern, 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 (JLOPS) 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. This year (2005-06), the GOI and the U.S. Embassy will conduct another opium study. In an effort to get better results, this survey will focus on limiting the area and number of plots where the data will be collected. The JLOPS study is crucial to India's plans to control diversion of licitly grown opium into the illicit market.
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 tries to monitor 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 offense under the Narcotics Drugs and Psychotropic Substances Act (NDPSA) -- the GOI's key counternarcotics law -- and punishable with imprisonment of up to 10 years. Intentional diversion of any substance (whether it is listed or not as a controlled substance in Indian law) for illicit manufacture of narcotic drugs and psychotropic substances (e.g., an unlisted replacement chemical for listed precursors) is also punishable under the NDPSA.
The GOI, in partnership with the Indian Chemical Manufacturing Association, imposes strict access controls on AA (acetic anhydydride), which is used to process opium into heroin. These controls include the requirement that AA be transported in specially fabricated sealing systems (which make it very difficult to tamper with the transportation and storage tankers' inlet and outlet valves), 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. The objective of this requirement is 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 in 1999/2000 to 1,776 metric tons in 2004/05. Licensed farmers are allowed to cultivate a maximum of 10 "ares" (one tenth of a hectare). This is a reduction from last year's 20 ares approved for the last opium growing season. "Opium years" straddle two calendar years. All licensed farmers must deliver all the opium they produce to the government alone, meeting a minimum qualifying yield (MQY) that specifies the number of kilograms of opium to be produced per hectare (HA) per state. The MQY is established yearly by the CBN prior to licensing. At the time Central Bureau of Narcotics (CBN) establishes the MQY, it also publishes the price per kilogram 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 crop years. 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. Since licit poppy cultivation is not confined to an enclosed area, many of the farmers integrate fields with other agricultural crops like soybean, wheat, garlic and sugarcane. This technology has also been 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. CBN ensures that each cultivated area doesn't exceed the prescribed size by measuring each one individually. Any cultivation in excess of five percent of the allotted cultivation area was uprooted, with the cultivator 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 for diversion.
In 2005, the CBN continued issuing microprocessor chip-based cards (Smart Identity Cards) for its licensed 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 also stores the previous years' data. The information stored on the card is read with handheld terminal/read-write machines that are provided to field divisions. CBN personnel will enter cultivation data into the cultivators' cards and the data will be uploaded to computers at CBN HQs and regional offices. The cards are delivered to cultivators at the time of licensing. The use of smart cards for the 2004/2005-crop year was successfully tested in two opium divisions. For crop year 2005/2006, the project will be expanded to include all of the 17 Opium Divisions, the three State Unit Headquarters and the Central Headquarters in Gwalior. The GOI periodically raises the official price per kilogram of opium, but illicit market prices are anywhere from four to five to ten 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 2005/2006 opium harvest year, CBN has decreased the number of hectares licensed (from 8,771 in 2004/2005 to 7,833 in 2005/2006) and the number of farmers licensed (from 87,682 in 2004/2005 to 79,016 in 2005/2006). The estimated yield for the 2005/06-crop year is 403 metric tons of opium.
Although there is no reliable estimate of diversion from India's licit opium industry, clearly, some diversion does take place. It is estimated that between 20-30 percent of the opium crop is diverted. 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. at all. In 2005, the GOI closed down one morphine base laboratory and one heroin processing facility.
India does not use the same production method as other legal producers of opium alkaloids, including Turkey, France, and Australia, which produce narcotics raw 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. The difference between India and other producers has certain implications. 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 (India's means of production) 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.
Once the gum reaches consumers, processing it is difficult because a residue remains after the narcotic alkaloids have been extracted. This residue must be disposed of with appropriate environmental safeguards. Because of this, pharmaceutical opiate processing companies prefer using CPS for ease of extracting the opiate alkaloids, but some in the U.S. have adapted their systems to use gum opium, since India has proven to be a reliable supplier. For its part, the GOI has explored the possibility of converting some of its opium crop to the CPS method. The GOI is also examining ways to expand India's opiate pharmaceutical processing industry and the availability of opiate pharmaceutical drugs to Indian consumers ( and to benefit from vertical integration of an industry in which India produces the key input, namely opium) through ventures with the private sector. Nevertheless, the financial and social costs of the transfer to CPS and the difficulty of purchasing appropriate technology to implement the change are daunting. Poppy straw technology is complicated. There are only a few countries that need it and have the most experience with it. But those countries-the natural source, should India be in the market for poppy straw technology-are India's direct competitors in the market for its products!
Morphine base ("brown sugar" 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 sugar" heroin comes from diverted licit Indian opium and is locally manufactured. Indian "brown sugar" heroin is also increasingly available in Nepal, Bangladesh, Sri Lanka, and the Maldives. 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.
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. There has been considerable amount of reporting in the local newspapers indicating that use of cocaine and ecstasy are on the rise. While smoking "brown sugar" heroin (morphine base) and cannabis remain India's principal means of ingesting recreational drugs, intravenous drug use of licit opiate/psychotropic pharmaceuticals (LOPPS) diverted for abuse is rising in India, replacing, almost completely, "white" heroin. In parts of India where intravenous drug users (IDUs) have been denied access to LOPPS, IDUs have turned to injecting "brown sugar" heroin. Drug users in Mumbai have discovered that injecting "brown sugar" heroin is much cheaper than "chasing," leading to an explosion of "brown sugar" heroin IDUs in Mumbai. Various licitly produced psychotropic drugs and opiate painkillers, cough medicines, and codeine are just some of the substances that have emerged as new drugs of choice.
III. Country Actions Against Drugs in 2005
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, since unrealistic minimum sentences in the prior law discouraged magistrates from returning convictions. From January 2005 through October 31, 2005, 8,544 people were prosecuted, resulting in 3,817 convictions. The total number of prosecutions/convictions may be larger when the complete 2005 statistics become available. In certain cases involving repeat offenders, who are dealing in commercial quantities of illegal drugs, the law allows for the death penalty. However, to date, no person has been given the death penalty for drug trafficking in India.
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 2005, Indian law enforcement authorities seized 620 kilograms of heroin in 2,833 cases. Indian law enforcement agencies also seized 778 kilograms of opium in 511 cases, 2,863 kilograms of hashish in 1,136 cases and 33 kilograms of morphine base in 79 cases. This is a significant quantity of seizures, placing India high on the list of countries with the largest seizures of opiates. Cocaine seizures, while small, have been increasing each year since 2003 (no figures available). Cocaine is available in India on the wealthy "party circuit," particularly in Mumbai and New Delhi.
In a joint investigation by the DEA and NCB, a major international illicit pharmaceutical drug internet marketing organization, which operated in the United States, India, Costa Rica and Australia, was disrupted and dismantled in April 2005. A total of 23 individuals were arrested -- 18 in the United States and five 5 in India. This organization distributed controlled pharmaceutical drugs via the Internet, including bulk ephedrine, a controlled precursor chemical, and ketamine (a veterinary pain killer, frequently abused in Asia). Internet websites used to distribute these pharmaceuticals were operated by multiple individuals located in the U.S. and throughout the world. The takedown of this drug organization resulted in the seizure of a large quantity of pharmaceutical drugs, including 108 kilograms of Indian ketamine seized in the U.S. The U.S. street value of the ketamine was estimated to be approximately $1.62 million. The total amount of controlled and noncontrolled pharmaceutical drugs seized in the U.S. alone was 4 million dosage units. The amount of controlled pharmaceutical drugs seized in India was approximately 3.6 million dosage units. This drug organization had an estimated 100,000 Internet retail customers, of which approximately 80 percent were located in the U.S. The total amount of money and property seized from this investigation was approximately $3.5 million dollars in India and $4 million in the United States.
In another Internet-related investigation in 2004/2005, DEA and India's NCB arrested three Indian nationals and one U.S. citizen for the illegal distribution of controlled pharmaceuticals. In addition to the arrests, a large quantity of controlled pharmaceuticals was seized, including Schedule II, III and IV controlled substance pharmaceuticals (U.S. designations). The investigation revealed that the pharmaceuticals were being ordered through a U.S. company that was operating an Internet online pharmacy. The arrest and break up of this illegal international pharmaceutical drug organization resulted in the seizure of 23,379 tablets of various controlled pharmaceuticals in India. The total amount of money seized from this investigation was approximately $350,000 in India and $400,000 in the United States.
From September to November 2005, Indian Customs seized five international mail packages that were found to contain a kilogram or more of Southwest Asian heroin destined for individuals in the United States. DEA New Delhi worked closely with Indian Customs and the NCB and conducted 3 international controlled deliveries of the seized heroin to the recipients in the United States. All three controlled deliveries were successful, leading to the arrest of five individuals in the United States. The related investigations continue, with efforts being made to identify co-conspirators in India and the United States.
These investigations are significant for a number of reasons. DEA New Delhi has seen an increase in the amount of heroin being smuggled into India from Afghanistan and Pakistan over the third and fourth quarters of 2005. In recent months, Indian Customs has arrested a number of West Africans flying from Kabul to New Delhi with heroin. In addition, the Indian Directorate of Revenue Intelligence (DRI) recently arrested three Nigerians and seized approximately 36 kilograms of heroin. Post-arrest statements indicated the 36 kilograms of heroin was of Afghan origin. This trend may continue, as the border between Pakistan and India is opening up to commerce and travel as cooperation between the two countries has increased. A contributing factor in the increase in seizures may be the result of Indian Customs' recent strategy to aggressively monitor and profile suspicious mail packages. The increased enforcement activities may also be a sign of Indian Customs' goal to be more proactive in drug law enforcement and its desire to widen the scope of its investigations to include international drug trafficking.
Recent intelligence provided by DHS Immigration and Customs Enforcement (ICE) indicates that during FY 2005, U.S. Customs seized 433 packages containing heroin that had been shipped to the United States from India. It should be noted that most of the individual packages contained 50 grams or less of heroin. Interestingly, there were no recorded DHS/ICE seizures of heroin packages from India during FY 2004.
In 2005, Indian Customs made 51 drug seizures in India including 3.5 kilograms of cocaine, 8.5 kilograms of heroin, 3,000 tablets of codeine sulphate, and 18 kilograms of hashish, destined for various international locations. Approximately 5.4 kilograms of heroin that was seized was intended for the United States.
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 corroborating 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 developing 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 its methods for 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 for them to ensure that each farmer under their jurisdiction turns in the largest possible crop. India has signed, but has not yet ratified, the UN Convention Against Corruption.
Agreements and Treaties. India is a party to the 1961 UN Single Convention on Narcotic Drugs as amended by the 1972 Protocol, the 1971 UN Convention on Psychotropic Substances and the 1988 UN Drug Convention. Both an MLAT and extradition treaty are in force 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 a mountainous, isolated jungle that would require significant material and human resources to conduct crop eradication campaigns. 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 three 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 heroin from Southwest Asia (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 of the heroin, seized in South India and apparently destined for Sri Lanka, is of domestic origin). Trafficking groups operating in India fall into four categories: Most 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/Burmese border.
Indian-produced methaqualone (Mandrax) trafficking to Southern and Eastern Africa continues. Although South Africa has increased methaqualone production, and there is also significant production and trafficking from China, India is still believed to be among the world's largest clandestine methalqualone producers. Seizures of methaqualone, which is trafficked in both pill and bulk form, have varied significantly, from 1,614 kilograms in 2004 to 468 kilograms through October 2005. Cannabis smuggled from Nepal is mainly consumed within India, but some makes its way to western destinations. India is also increasingly emerging as a supplier of licit opiate/psychotropic pharmaceuticals (LOPPS), both organic and synthetic, to the Middle East, Pakistan, Bangladesh 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. Thousands of illegal "personal use" shipments are being intercepted in the mail system in the United States each year by Customs and Border Protection. These "personal use" quantity shipments are usually too small to garner much interest by themselves, and most appear to be the result of illegal Internet sales. Codeine-based cough remedies are a prominent example.
Domestic Programs (Demand Reduction). 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 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, and 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 IDU's. 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 is more expensive than what LOPPS usually cost.) 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 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 and other drug paraphernalia with as many as eight to 15 people a day. 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. In the Indian context, the best efforts of an energetic government and NGO community are always in danger of being swamped by the simple scale of the problem.
IV. U.S. Policy Initiatives and Programs
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 (LOA) amendments providing for the State Department to make available drug assistance funding worth $2.184 million for counternarcotics law enforcement. In 2004, another $40,000 was added to the LOA. While some funds have already been spent, a share remains to be spent, and efforts continue to identify new activities. A separate grant of $50,000 directly to NGO Navjyoti of the Delhi Police Foundation funded 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. This project was concluded in July 2005. Each year since 2003, and planned through 2007, the U.S. Coast Guard provides the Indian Coast Guard boarding officer training.
The Road Ahead. The GOI continues to tighten controls over licit opium cultivation. The NCB's move to the Ministry of Home Affairs in 2004 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 and 2005 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 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, and 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 Operation Cohesion and Project Prism. DEA has a Diversion Investigator assigned to its New Delhi office.
India's status as a growing regional financial center, its large system of informal cross-border money flows and its widely perceived tax avoidance problem all contribute to the country's vulnerability 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. India is a major drug-transit country.
India's historically strict foreign-exchange laws and transaction reporting requirements, together with 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 30 and 40 percent of the formal market. Remittances to India reported through legal, formal channels in 2004-2005 amounted to $20.5 billion.
Under the hawala system, individuals transfer value from one location to another, often without the actual movement of currency. Key features of the hawala system are that it transfers value without actually moving funds. When accounts need to be balanced between hawaladars, a number of techniques are used including cash and bank transfers. But historically and culturally, trade is the most common vehicle to provide "counter valuation." This is often accomplished through invoice manipulation such as over and under valuation. Any commodity can be used in hawala value transfer but gold remains most popular. The hawala system provides anonymity and security to transacting individuals. Reportedly, 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 remittance service as a bank 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 the widespread hawala dealers operate illegally and therefore cannot be registered and are beyond the reach of regulation. Reportedly, the RBI does intend to increase its regulation of non-bank money transfer operations by entities 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 thought that the growing Indian diamond trade has also been increasingly important in providing countervaluation, 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.
India has both legal and illegal unregulated black market channels for selling goods. Smuggled goods such as food items, computer parts, cellular phones, gold, and a wide range of imported consumer goods are routinely sold through the black market. By avoiding customs duties and taxes and dealing in cash transactions, black market merchants offer better prices than those offered by regulated merchants. However, with trade liberalization and the increase in the number of foreign companies doing business in India, the volume of business in smuggled goods has fallen significantly. Most products previously sold through the black market are now sold through lawful channels.
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 introduced a value added tax (VAT) in April 2005. This tax replaces 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. Twenty-one Indian states have already implemented the VAT, and the GOI anticipates that the remaining nine states will do so by April 2006.
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 (NDPSA) 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.
Amendments to the NDPSA dating from 2001 allow the CA to seize any asset owned or used by a narcotics trafficker immediately 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 appear to lack sufficient training in drafting and expeditiously implementing asset freezing orders. During 2005, the CA held nine asset seizure and forfeiture workshops pursuant to the NDPSA in New Delhi, Himchal Pradesh, Uttar Pradesh, Rajasthan, and Andra Pradesh, to train law enforcement officers in asset seizure and forfeiture procedures and regulations. The GOI hopes the training will lead to increased seizures and forfeitures from illicit narcotics proceeds.
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 MOF's Directorate of Enforcement (DOE) enforces FEMA and COFEPOSA. 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). Implementing rules and regulations for the PMLA were promulgated in July 2005. Penalties for offenses under the PMLA are severe and may include imprisonment for three to seven years and fines as high as $10,280. If the money laundering offense is related to a drug offense under the NDPSA, imprisonment can be extended to a maximum of ten years. The PMLA mandates that banks, financial institutions and intermediaries (including stock market intermediaries such as brokers) maintain records of all cash transactions exceeding $21,740. However, there have been no prosecutions or convictions under the PMLA since its inception.
With the notification of the PMLA in July 2005, India is establishing a central financial intelligence unit (FIU) to centralize and coordinate most of its anti-money laundering and counter terrorist financing strategies. The FIU will be an independent unit located within the Central Economic Intelligence Bureau (CEIB), under the administrative control of the MOF's Department of Revenue. The MOF has authorized 43 positions for the FIU, including a director (joint secretary), seven additional directors, one technical director, ten technical officers, and clerical personnel. This multi-disciplinary team of officers will be seconded for a two-year rotation. The directors are from various government agencies -- Police, Revenue Department, Income Tax, Customs, RBI, Intelligence Bureau, Securities and Exchange Board of India (SEBI), and the Legal Affairs Department of the Ministry of Law. The FIU expects to have all these positions filled, and to begin receiving suspicious transaction reports (STRs) by March 2006.
The FIU will be solely responsible for receiving, processing, analyzing, and disseminating information on STRs, and will independently refer suspicious cases to the appropriate enforcement agency. The MOF's Enforcement Directorate will handle the investigations and prosecution of money laundering cases. The GOI has established an Economic Intelligence Council (EIC) to enhance coordination among the various enforcement agencies and directorates in the MOF. The EIC provides a forum for enforcement agencies to strengthen intelligence and operational coordination, to formulate common strategies to combat economic offenses, and to discuss cases requiring interagency cooperation. In addition to the EIC, there are 18 regional economic committees in India. The CEIB will function as the secretariat for the EIC. The CEIB interacts with the National Security Council, the Intelligence Bureau, and the Ministry of Home Affairs on matters concerning national security and terrorism.
The FIU's core team will phase in its operations as follows: Phase 1, beginning in January 2006, will entail the bulk filing of information manually and the securing of this information electronically on CDs. Phase two, with a target date of June 2006, will focus on firming up formats and analytical tools, customization of requirements, and testing of analytical tools. The final phase, to be completed by December 2006, will include the sharing of information domestically and with other FIUs, the latter on a case-by-case basis. The FIU and the MOF are making all efforts to become compliant with Egmont standards with the ultimate goal of becoming a member of the Egmont Group.
The Central Bureau of Investigation, the Directorate of Revenue Intelligence, Customs, and Excise, the RBI, the Competent Authority, and the MOF are all 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 (DHA/ICE). DHS/ICE carried out successful investigations on three of these cases and forwarded tangible results to the MOF's DOE. In 2005, the DOE forwarded two additional hawala-linked money laundering cases to DHS/ICE. DHS/ICE has provided investigative assistance.
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 anti-money laundering regulations are observed. The RBI issued a notice in 2002 to commercial banks instructing them to adopt the "know-your-customer rules". 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 drafted to ensure that they comply with Financial Action Task Force (FATF) recommendations. 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. The RBI also asked all commercial banks to become FATF-compliant regarding customer identification for existing as well as new accounts by December 2005.
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 is a party to the UN International Convention for the Suppression of the Financing of Terrorism. In October 2001, the GOI and the United States signed a mutual legal assistance treaty, which entered into force in October 2005. 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 is implementing this convention through the Unlawful Activities Prevention Act. India is a party to 1988 UN Drug (Vienna) Convention. India implements the 1988 UN Drug Convention through amendments to the NDPSA (in 1989 and 2001) and the PMLA. It signed the Palermo Convention in December 2002 but has not yet ratified it.
India is a member of INTERPOL, and the CBI is the official INTERPOL unit in India. All state police forces and other law enforcement agencies have a link through INTERPOL/New Delhi to their counterparts in other countries for purposes of criminal investigations. India's Customs service is a member of the World Customs Organization, and shares enforcement information with countries in the Asia/Pacific region.
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 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 initiate regulation and increase law enforcement actions in this area. Indian citizens' involvement in the underworld of the international diamond trade should be examined. It also needs to quickly finalize the implementing regulations to the anti-money laundering law and ensure that the new FIU is fully operational in order to disseminate suspicious transaction reports to domestic law endowment and enhance information sharing with other FIUs globally. 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 trade-based money laundering. India should become a party to the UN Convention against Transnational Organized Crime.