Needed, a uniform stance on funds from non-FATF compliant countries

| Updated on October 18, 2020 Published on October 18, 2020

The varied approaches adopted by the regulators and the government are sending a jumbled signal to foreign investors regarding India’s tolerance towards money laundering and other such practices

The Reserve Bank of India’s (RBI) move to disallow financial firms to be set up with investment from Mauritius has brought focus on an aspect of regulatory divergence in the country. The central bank’s move follows Mauritius being moved to the Financial Action Task Force’s (FATF) grey list that contains jurisdictions under increased monitoring. While countries in this list do work to address the gaps in their framework to counter money laundering, terrorist and proliferation financing in a time bound manner, the FATF’s action renews the concerns regarding the opacity of the funds coming from Mauritius. In May, the European Commission had also included Mauritius in the list of countries that posed high risk to the EU’s financial system due to the deficiencies in their systems to counter money laundering and such other nefarious activities. The RBI’s stance that funds of doubtful origin are not required in the financial sector is correct. But it would be good if the Securities and Exchange Board of India (SEBI) and the government also make up their minds regarding funds from Mauritius.

Currently, Mauritius accounts for the third-highest foreign direct investment flows with ₹6,825 crore received in the quarter ended June 2020. While countries such as Singapore and the Netherlands have overtaken Mauritius in recent years, a large part of the investments into India is still routed through Mauritius. With the RBI clamping down on FDI in financial services, the Finance Ministry needs to decide if it should halt investments from the island nation until it is moved out of the grey list. The stock market regulator has also tried to shrug off the FATF action concerning Mauritius as a transient phase. Following the FATF’s move in February, SEBI issued a clarification stating that FPIs from Mauritius continue to be eligible for registering with it, with increased monitoring as per FATF norms. The FATF action should have evoked a more serious response from SEBI than allowing investors from Mauritius to register as Category-I FPIs, where the surveillance is clearly lower. The varied approaches adopted by the regulators and the government are sending a jumbled signal to foreign investors regarding our tolerance towards money laundering and other such practices.

It will be good if the Finance Ministry holds a discussion with all regulators to arrive at a uniform policy towards funds coming in from Mauritius. While the implementation of the General Anti Avoidance Rules and the tightening of the double taxation treaty with Mauritius have gone a long way towards reducing the misuse of this route for round-tripping, the multi-layered entities operating in the country still fall short on transparency. Authorities also need to seriously prepare for the mutual evaluation of FATF compliance that is due in February and March next year. India should use this exercise to tighten its systems and procedures to minimise round-tripping and terror financing.

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Published on October 18, 2020
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