Stop financing terror

Do this with sensible and coordinated regulation rather than draconian steps

The shadow of Paris loomed large over the recently concluded G-20 meeting at Antalya, Turkey. Apart from a security response, the terror attack is likely to translate into a greater resolve to implement the recommendations of the Financial Action Task Force (FATF) against money laundering. This involves implementing uniform, watertight laws worldwide, with better exchange of information between countries — a task that seems more possible than ever in a digital, interconnected world. However, the sobering truth is that black money flows are expected to account for anywhere between 2 per cent and 5 per cent of the global GDP, or at least $1.5 trillion — this amounts to tracking illegal transactions as large as India’s economy. There is likely to be a renewed emphasis on cracking down on shell companies — one round of which has already taken place in the wake of the 2008 financial crisis — and illegal trade practices such as over-invoicing and under-invoicing. Easy monetary policies that have made all forms of financing cheaper and easier may come under scrutiny, further increasing the likelihood of the Fed raising its rates next month. India, always vulnerable to global terror attacks, has every reason to participate in global efforts to check money laundering. The FATF’s latest recommendations, updated in October, are likely to be implemented in right earnest. However, the regulatory challenge the world over is to use technology precisely and effectively without browbeating bona fide investors or breathing down the necks of ordinary citizens. Subtle methods may turn out to be more effective than heavy policing. To the extent that illegal or hawala channels are deployed to avoid the levies involved in official transfers rather than to fund nefarious activity, it makes sense to bring down such levies.

We may soon see a tighter global protocol for financial transactions. This could entail gleaning and exchanging information on ‘politically exposed persons’, collecting accurate information on wire transfers, establishing the source of wealth and not transacting with shell banks. Lawyers, precious metals dealers and real estate agents may come under pressure to report suspicious transactions. India’s trade invoicing as well as flows through the ‘participatory note’ route may come under scrutiny. While countries such as Algeria, Iran, Ecuador and North Korea find a disparaging mention in the FATF report, it appears to have been influenced by the US’ worldview. If the US’ allies in West Asia are not on the radar, efforts to turn the world into a better place may suffer.

World markets have been rather calm after the attacks, but the Euro Zone may see a slight dip in consumer confidence and a weakening of the euro. That isn’t good news for our already sagging exports. However, if the story of FDI-driven capital flows this year is anything to go by, overseas investors are looking at India as a long-term bet: all the more reason, then, to improve our financial ecosystem, and shut out conduits for terror finance.

Published on November 16, 2015
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