Source: 2007

International Narcotics Control Strategy Report -- 2007

Released by the Bureau for International Narcotics and Law Enforcement Affairs

Southwest Asia

India

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. 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. Insurgent groups operating in the Northeast finance their activities through smuggling of drugs from Burma into India. Much of the hashish and cannabis intended for international markets is smuggled into India from Nepal. 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. The Government of India (GOI) formally released the results of the 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, particularly in the Northeast states bordering Burma, continues to be a concern, resulting in an extremely high incidence of HIV/AIDS in these populations. Major metropolitan areas increasingly report the use of cocaine, Ecstasy and other synthetic 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 past year (2005-06), the GOI and the U.S. Embassy conducted another opium study, focusing on limiting the area and number of plots where the data are collected. 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 four 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, stocks rose to 1,776 metric tons last year (2004/05), but are now down to 1,476 metric tons at the end of the 2005/06-crop year.

Licensed farmers are allowed to cultivate a maximum of 10 "ares" (one tenth of a hectare), the same as last year. "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 kg of opium to be produced per hectare (HA), per state. The MQY is established yearly by the Central Bureau of Narcotics (CBN) prior to licensing. At the time the 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. 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. This year the CBN intends to use this technology to identify illicit cultivation of opium in various parts of the country as well.

Any cultivation in excess of five percent of the allotted cultivation area is not only uprooted, but the cultivator is also subject to prosecution. During the lancing period, the CBN appoints a village headman for each village to record the daily yield of opium from the cultivators under his charge. CBN regularly checks the register and physically verifies 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. In 2006, the CBN also began experimenting with closed circuit television cameras to monitor the collection and weighing of opium gum.

In 2006, the CBN continued issuing 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 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. For crop year 2005/2006, the project was 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 kilo of opium, but illicit market prices are four to five, even 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. In the 2005/2006 opium harvest year, CBN significantly decreased the number of hectares licensed from 8,771 in 2004/2005 to 6,976 in 2005/2006, and the number of farmers licensed from 87,682 in 2004/2005 to 72,478 in 2005/2006. Much of this reduction took place in Uttar Pradesh, where CBN is in the process of phasing out opium cultivation. The estimated yield for the 2005/06-crop year is 372 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 significant quantities of opium or its derivatives diverted from India's fields reaches the U.S. In 2006, the GOI reports it seized 142 kg of licit opium and closed down three morphine-manufacturing facilities.

Poppies harvested using concentrate of poppy straw (CPS) are not lanced, and since the dried poppy heads cannot be readily converted into a usable narcotics substance, diversion opportunities are minimal. However, 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 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 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.
Processing opium gum 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, with the exception of certain companies, which have adapted their equipment and methods to be able to use gum opium.

To meet this challenge, 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 domestic opiate pharmaceutical processing industry and the availability of opiate pharmaceutical drugs to Indian consumers through ventures with the private sector. 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, some of the most obvious places where such equipment and technologies would be available, along with advice on how to use them, 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 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 recent period of Indian/Pakistani border tensions, are on the upswing.

III. Country Actions Against Drugs in 2006

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. Prosecutions under the NDPSA have increased dramatically, from 7,874 persons in 2003 to 20,138 in calendar year 2005. The overall conviction rate has also increased, from 38 percent in 2003 (3,006 convictions) to 45 percent in 2005 (9,074 convictions). In certain cases involving repeat offenders dealing in commercial quantities of illegal drugs, the law allows for the death penalty, although there have been no such sentences to date.

In April 2003, GOI moved the Narcotics Control Bureau (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.

Law Enforcement Efforts. While heroin seizures have remained steady (991 kg in 2003 and 981 in 2005), seizures of opium have grown from 1,720 in 2003 to 2,009 in 2005. Seizure statistics for other drugs, such as cocaine, methaqualone and ephedrine, tend to fluctuate more dramatically as a result of larger single seizures, but statistics for all three so far in 2006 show large increases. Marijuana and hashish seizures have shown constant explosive growth in recent years. Marijuana seizures almost doubled the last two years (from 79,653 kg in 2003 to 153,660 in 2005), and hashish seizures are up 32 percent over the same period (3,013 kg in 2003 to 3,965 in 2005).

The year 2006 saw a number of major seizures that indicate an increasing sophistication in the law enforcement response to illicit narcotics and precursor trafficking in and through India. In June, in what was reported to be the largest cocaine seizure in Asia, the NCB seized 200 kg on a cargo ship in the port of Mumbai. The ship M.V. Voyager had been tracked from Ecuador through the Far East and into India.

The New Delhi police had two major successes in August 2006. On August 14 and 15 they seized 100 kg of ephedrine, 600 kg of ketamine, and 3 kg of hashish in an operation that resulted in the arrest of 4 individuals. The accused were in the process of shipping at least some of the goods to Canada using commercial express mail services, with indications that they had been doing the same for the past two years. In the second incident, officials seized more than 4,400 kg of Methaqualone on August 27, the largest such seizure in India. The accused were in the business of stealing the contents of shipping containers.

On September 3, the NCB seized a total of 550 kg of ephedrine at two DHL locations in New Delhi, again destined for Canada. Using information from the September seizure, on October 18 the NCB raided a factory in New Delhi that was being established as a methamphetamine laboratory and arrested seven individuals and seized an additional 550 kg of ephedrine. In November, the NCB searched a container in the port of Calcutta and found extensive laboratory equipment that is believed was destined for a methamphetamine laboratory outside of New Delhi. The seizures of ephedrine made in these cases dwarf the 8 kg of ephedrine reported to have been seized in India in 2005. These seizures, along with the seizure made by Delhi Police in 2006, highlight a possible emerging trend of Canadian and Chinese drug trafficking organizations attempting to exploit India as a source for ephedrine, a critical component in the manufacture of methamphetamine.

A joint investigation by the DEA and NCB in 2005 led to the dismantling of a major international pharmaceutical drug organization that was distributing controlled pharmaceuticals such as bulk ephedrine (a controlled precursor chemical) and ketamine (a Schedule III non- narcotic controlled substance in the U.S.) internationally through the Internet. The international drug trafficking ring, consisting of over 20 individuals in the U.S. and India, may have had as many as 80,000 retail customers. The 108 kg of Indian ketamine seized in the U.S. was valued at $1.62 million. The total amount of U.S. money and property seized in this investigation was $2 million dollars in India and $6 million in the United States. In another joint investigation, DEA and NCB cooperated to take down another Internet pharmacy. The result of this case was seven arrests in the United States and five arrests in India. The Internet pharmacies were being operated by individuals in India in conjunction with a call center that was processing orders for U.S.-based customers. The call center in India employed fifteen people and processed approximately $400,000 worth of pharmaceuticals per month.

Subsequent joint investigations have shown the continuing use of the Internet to distribute drugs and pharmaceuticals of all kinds from India to the U.S. and other countries. In the fall of 2005, Indian Customs seized five international mail packages that were found to contain a kg or more of Southwest Asian heroin destined for individuals in the United States, with controlled deliveries leading to the arrest of five individuals in the U.S. Heroin being smuggled into India from Afghanistan and Pakistan has picked up over the past year, with West Africans often arrested as the carriers. This trend may continue as the border between Pakistan and India opens up to increasing commerce and travel as relations between the two countries improve. Indian law enforcement agencies are also becoming more proactive in fighting international drug trafficking.

Corruption. The Indian media periodically 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. The GOI does not, as a matter of government policy, encourage or facilitate illicit drug production or distribution, nor is it involved in laundering the proceeds of the sale of illicit drugs. Similarly, we are not aware of any individual senior government official so involved. Both the CBN and NCB periodically take steps to arrest, convict, and punish corrupt officials within their ranks. The CBN frequently transfers officials in key drug producing areas to guard against corruption. 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 for 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) in 2001 that came into force in October 2005. 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 a Customs Mutual Assistance Agreement on December 15, 2004. A modern US-India extradition treaty entered into force in 1999, replacing the outdated US-UK 1931 treaty, and a US-India mutual legal assistance treaty (MLAT) entered into force in 2005.

Cultivation/Production. The bulk of India's illicit poppy 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, just to reach it. 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 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 kg 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 in New Delhi and Mumbai tend to reinforce this assessment. However, the bulk of heroin seized in the past two years has been of domestic origin, and it was seized in South India, and was apparently destined for Sri Lanka. Trafficking groups operating in India fall into four categories. Most seizures in Mumbai and New Delhi involve 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. In addition, insurgent groups in these states have utilized drug trafficking as a means to finance their operations against the Indian Government.

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 forms, have varied significantly, from 7,458 kg in 2004 to 472 kg in 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 manufacturer and 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. DHS Customs and Border Protection are intercepting thousands of illegal "personal use" shipments in the mail system in the United States each year. 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.

Domestic Programs/Demand Reduction. Newspapers frequently refer to Ecstasy and cocaine use on the Mumbai and New Delhi "party circuit," but there is little information on the extent of their use. There has been a considerable amount of reporting in local newspapers indicating that the use of cocaine and Ecstasy are on the rise. While smoking "brown sugar" 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 intravenous drug users (IDUs) have been denied access to LOPPS, IDUs have turned to injecting "brown sugar" heroin. Various licitly produced psychotropic drugs and opiate painkillers, 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) released a 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. Although drug abuse cuts across a wide spectrum of Indian 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. Widespread needle sharing has led to high rates of HIV/AIDS and overdoses. The states of Manipur and Nagaland are among the top five states in India in terms of HIV infection (disproportionately affecting the 15- to 30-year old population in these states), primarily due to intravenous drug use.

The popularity of injecting licit pharmaceuticals can be attributed to four factors. First, they are far less expensive than their illegal counterparts. Second, they provide quick, intense "highs" that many users prefer to the slower, longer-lasting highs resulting from heroin. Third, many IDUs believe that they experience fewer and milder withdrawal symptoms with pharmaceutical drug use. Finally, licit opiate/psychotropic pharmaceuticals are widely available and easy to obtain since virtually any drug retail outlet will sell them without a prescription.

The 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 spends about $5 million on NGO support each 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. 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. In 2004 a Customs Mutual Assistance Agreement was signed. The U.S. and India have had a long-standing extradition relationship; however, India's efforts to bring about prompt conclusion of extradition proceedings have been poor. The USG has repeatedly asked the GOI to take steps to bring extradition proceedings to fruition more promptly. It is hoped that India will be able to soon conclude the extradition proceeding for Sarabeet Singh, charged with narcotics trafficking, which have been underway since 2002. In 2006 India's NCB provided prompt and effective cooperation under the MLAT in connection with ah narcotics prosecution in EDPA; other requests have been stalled, however. The USG hopes to consult with India soon on MLAT implementation.

The Road Ahead. 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 and 2005 than ever before. Other training included standard and advanced boarding officer training by the USCG. Our joint LOA (Assistance Agreement) Monitoring Committee Meetings with the GOI ensure that funds achieve desired results, or are otherwise reprogrammed to higher priority projects. The LOA project to enhance and improve NCB's intelligence gathering and information sharing will enable it to better target drug traffickers and improve its cooperation with DEA. Another project managed by the Ministry of Finance trains law enforcement officials across India on asset forfeiture regulations. We also use LOA funds to build the capacity of Indian law enforcement agencies to fight international narcotics trafficking by providing them with badly needed commodities and equipment. 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.

V. Statistical Tables (through October 2006)

Drug seizure statistics are kept by the NCB (Ministry of Home Affairs) and updated on a monthly basis. The accuracy of the statistics is dependent upon the quality and quantity of information received by the NCB from law enforcement agencies throughout India. Statistics relative to opium cultivation and production are kept by the CBN (Ministry of Finance).

Note - not all information is available in all categories

POPPY CULTIVATION

Poppy cultivation/harvest in hectares

Final figures for opium gum yields in metric tons at 90 percent consistency; provisional yields at 70 percent consistency

Average yield of gum per hectare in kg

Opium prices paid to farmers in rupees (RS. 45 equals one USD). The price of opium for the 2006/07 crop year has yet to be declared by the GOI

DRUG SEIZURES 2004-2006

(2006 statistics through October, 2005 figures revised)

*Through October

Money Laundering

India's growing status as a regional financial center, its large system of informal cross-border money flows, and its widely perceived tax avoidance problems 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. Historically, because of its location between the heroin-producing countries of the Golden Triangle and Golden Crescent, India has been a drug-transit country.

India's strict foreign-exchange laws and transaction reporting requirements, combined with the banking industry's due diligence policy, make it difficult for criminals to use banks or other financial institutions to launder money. Accordingly, large portions of illegal proceeds are 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 2005-2006 amounted to $24 billion (reportedly the largest in the world).

Reportedly, many Indians do not trust banks and prefer to avoid the lengthy paperwork required to complete a money transfer through a financial institution. The hawala system can provide the same remittance service as a bank with little or no documentation and at lower rates and provide anonymity and security for their customers. 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 nonbank 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, many believe 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 is used extensively to avoid both customs duties, taxes and to launder illicit proceeds through trade-based money laundering.

India has illegal 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 dealing in cash transactions and avoiding customs duties and taxes, black market merchants offer better prices than those offered by regulated merchants. However, due to trade liberalization and an increase in the number of foreign companies doing business in India, the business volume in smuggled goods has fallen significantly. Most products previously sold in the black market are now traded through lawful channels.

While tax evasion is also widespread, the GOI is gradually making changes to the tax system. The government now requires individuals to use a personal identification number to pay taxes, purchase foreign exchange, and apply for passports. The GOI also introduced a value added tax (VAT) in April 2005 which replaced numerous complicated state sales taxes and excise taxes. As a result, the incentives and opportunities for businesses to conceal their sales or income levels have been reduced.

Most of the twenty-eight Indian states have implemented the national VAT mandate, and the GOI anticipates that all states will be compliant by April 2007.

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 for 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 the SAFEMA.

2001 Amendments to the NDPSA allow the CA to seize any asset owned or used by a narcotics trafficker immediately upon arrest. Previously, assets could only be seized after a conviction. Even so, 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. In 2005, pursuant to the NDPSA and with U.S. Government funding through its Letter of Agreement with India, the CA held nine asset seizure and forfeiture workshops in New Delhi, Himachal 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), implemented in 2000, is one of the GOI's primary tools for fighting money laundering. The FEMA's objectives include establishing controls over foreign exchange, preventing capital flight, and maintaining 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.

The Prevention of Money Laundering Act (PMLA) was signed into 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 (such as stock market brokers) maintain records of all cash transactions exceeding $21,740. However, to date, there have been no prosecutions or convictions under the PMLA.

With the notification of the PMLA in July 2005, a financial intelligence unit (FIU) was established in January 2006 with the mandate to combat money laundering and terrorist financing. The FIU is the central repository to receive process, analyze, and disseminate information from suspicious transaction reports (STRs) and general cash transaction reports from financial institutions, banking companies, and intermediaries. It acts independently to refer such cases to the appropriate enforcement agency.

Since it was initiated, India's FIU has received about 450 STRs.

The MOF's Enforcement Directorate is responsible for investigations and for the 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 eighteen regional economic committees in India. The Central Economic Intelligence Bureau (CEIB) functions 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 and the MOF are actively working to amend regulations in order to be compliant with international standards. At present, the PMLA does not include comprehensive provisions on terrorism financing. The MOF has organized a committee of the relevant departments and ministries to amend the PMLA, which are likely to be introduced in the July-August, 2007 parliamentary session.

Amendments will include provisions to criminalize terrorism financing and incorporate most of the FATF recommended categories of offenses.

In October 2006, the Finance Ministry stated that India had agreed to reconcile its list of predicate crimes with that of the Financial Action Task Force (FATF) and not set minimum property value thresholds on predicate crimes. As of December 2006, India is a FATF observer and has a two year probationary period to become compliant with FATF norms to become a member. Full FATF membership has been one criterion identified to help India move towards a sufficient anti-money laundering and terrorist financing (AML/CTF) regime required by the U.S. Federal Reserve Board in making determinations on foreign bank branch applications. In this context, the GOI is seeking to amend the PMLA to block terrorism financing through banking and financial institution channels.

After PMLA changes are fully enacted, the Securities and Exchange Board of India (SEBI) Act will also be revised to include similar offenses.

The Central Bureau of Investigation (CBI), the Directorate of Revenue Intelligence (DRI), Customs and Excise, RBI, the Competent Authority, and the MOF are all active in anti-money laundering efforts. During 2004, 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 (DHS/ICE). DHS/ICE carried out successful investigations on three of these cases and forwarded tangible results to the MOF's Department of Enforcement. During 2005, the Directorate of Enforcement (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. For example, banks are beginning to hire compliance officers to ensure that anti-money laundering regulations are being observed. The RBI issued a notice in 2002 to commercial banks instructing them to adopt the due diligence 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 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 $10,000. Finally, banks must report suspicious transactions.

Since March 2006, the FIU has been receiving reports on suspicious transactions and cash flows from banks, financial institutions, and intermediaries involving over USD $22,490. About 50 percent of such transactions are reported electronically by public and private banks (led by the large private banks) while the other institutions are only equipped to report manually. The FIU is in the process of developing a secure gateway for submission of electronic STRs which should be in place by December 2007.

A circular to all intermediaries registered with SEBI was issued on the obligations to prevent money laundering. The circular included information on the maintenance of records, preservation of information with respect to certain transactions, and reporting to the Director of the FIU suspicious cash flows and financial transactions.

The GOI has the power to order banks to freeze assets. In November 2004, the RBI issued a circular updating its due diligence 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 UNSCR 1267 Sanctions Committee's consolidated list is routinely circulated to all financial institutions. The RBI also asked all commercial banks to become FATF-compliant in terms of customer identification for existing as well as new accounts. These guidelines went into effect in December 2005. Banks have been enforcing the guidelines strictly with new customers and gradually phasing in the procedures with old customers. High-risk accounts are subject to intense monitoring.

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. The OBUs include overseas companies, partnership firms, societies, and other corporate bodies. OBUs must be audited to confirm 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; however, the auditing firm is not required to obtain government approval.

The CBI is a member of INTERPOL. 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.

GOI regulations governing charities remain antiquated and the process by which charities are governed at the provincial and regional levels remain weak. The GOI does require charities to register with the state-based Registrar of Societies, and, if seeking tax exempt status, they must apply separately with the Exemptions Department of the Central Board of Direct Taxes. There remain no guidelines or provisions governing the oversight of charities for AML/CFT purposes, and there remains a need for increased integration between charities regulators and law enforcement authorities regarding the threat of terrorist finance. 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. 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 such as criminalization of terrorist financing.

India is a party to the 1988 UN Drug Convention, and is a member of the Asia/Pacific Group (APG) on Money Laundering. India implements the 1988 UN Drug Convention through amendments to the NDPSA (in 1989 and 2001) and the PMLA. 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 took effect in October 2005. India has also signed a police and security cooperation protocol with Turkey that provides for joint efforts to combat money laundering. The GOI is implementing this convention through the Unlawful Activities Prevention Act.

Since terrorist financing in India is linked to the hawala system, the Government of India should cooperate fully with international initiatives to provide increased transparency in alternative remittance systems, and, if necessary should initiate regulation and increase law enforcement actions in this area.

India should examine the scope of its citizens' involvement in the illicit international diamond trade. It also needs to quickly finalize the implementation of regulations to the anti-money laundering law and ensure that the new FIU is fully operational. Meaningful tax reform will also assist in negating the popularity of hawala and lessen money laundering. Increased enforcement action should also be taken in order to effectively combat trade-based money laundering. Additionally, India should become a party to the UN Convention against Transnational Organized Crime.

Chemical Controls

India's developed chemical industry is one of the world's largest producers of chemicals that can be misused in the manufacture of illicit drugs. Chemicals are controlled in India under three different laws, the Narcotic Drugs and Psychotropic Substances Act (NDPS) of 1985, the Customs Act of 1962 and the Foreign Trade Development & Regulation Act of 1992.

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 NDPS 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 will not permit the export of key chemicals until it has issued a No Objection Certificate. It also requires a No Objection Certificate for the import of acetic anhydride, ergotamine and piperonal. The government has also placed acetic anhydride under the control of the Customs Act for movements within 100 km of the Indo-Burmese border and 50 km of the Indo- Pakistan border. As an additional safeguard, all vehicles transporting acetic anhydride must be sealed with tamper proof seals.

Cooperation between U.S. and Indian authorities on chemical control is excellent, including 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 Project Cohesion and Project Prism, where it is taking an active role. DEA has a Diversion Investigator assigned to its New Delhi office.