Round-tripping worries return as Mauritius moved to FATF’s grey list

The Financial Action Task Force moving Mauritius to the list of jurisdictions under increased monitoring, commonly known as the ‘grey list’, once again flags concerns regarding the colour of foreign portfolio and foreign direct investment funds flowing into India. It is true that this is not a cause for undue alarm, as countries moved to the grey list strive to actively work with the FATF to address strategic deficiencies to counter money laundering, terrorist financing, and proliferation financing, in a time-bound manner. Mauritius has also made a commitment in February that it will implement a series of measures, including risk-based supervision, providing access to accurate basic and beneficial ownership information by competent authorities and demonstrating the capacity to conduct money-laundering investigations.

However, the FATF’s move shows that Indian authorities need to stay vigilant with regard to money received from the island nation. Foreign portfolio funds, invested into Indian equity and debt market through Mauritius, amounted to ₹4.37 trillion towards the end of January 2020; the second highest source after the US. Cumulative foreign direct investments through Mauritius totalled ₹7.8 trillion in September 2019; the largest source. While the favourable tax regime could have attracted those using innovative arrangements to reduce tax, both the RBI as well as SEBI have been aware that owners of funds invested through brass-plate companies and multi-tiered investment structures in Mauritius are Indians. Over the years, both regulators have been tightening the disclosures required by these companies to reveal the ultimate owners of the funds. Besides tweaking the double-tax agreement with Mauritius to withdraw the capital gains tax benefit, the implementation of GAAR and other BEPS recommendations has helped in cleaning this route, somewhat. But the FATF’s move shows that gaps remain in the regulatory and risk assessment process in Mauritius.

Additional complications arise from the fact that in November last year, SEBI had re-categorised all funds from FATF member countries as Category-I FPIs. Also, unregulated funds where the investment manager is from a FATF member country and registered as a Category-I FPI prior to November 2019, is also to be bucketed with Category-I FPIs. Foreign investors in Category-I have to make fewer disclosures and are subject to lesser scrutiny than Category-II FPIs. When queried by FPIs about their status in India after the FATF’s change, SEBI has held that they will continued to be treated as FPIs in their current categories with ‘increased monitoring as per FATF norms’. This statement from SEBI is inadequate , as it does not spell out the measures that the regulator intends to take to increase its scrutiny. SEBI should take this as a signal to once again review the checks it runs on funds investing from Mauritius and tighten them. With the country’s external balance in a far healthier state, regulators need not worry about the destabilising impact of tighter FPI scrutiny on the economy.

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