In a bid to strengthen anti-money laundering (AML) efforts and combat illicit financial activities, Indian banks are set to blacklist diamond houses, jewellers, and gem stores that fail to disclose the ‘ultimate beneficial owners’ (UBOs) of their trading partners. This move, led by the Gem & Jewellery Export Promotion Council (GJEPC), aims to enhance transparency in the industry, identify true owners, and prevent fraudulent practices.

The Drive for Transparency

The initiative to trace UBOs gained momentum after the Nirav Modi-Mehul Choksi scam in 2019, prompting the GJEPC to introduce the ‘MYKYC’ regime. This mandated members to reveal UBOs of companies, along with personal details of proprietors of domestic firms. However, the challenge lies in enforcing similar disclosures internationally, especially in countries like the UAE, where strict KYC systems are not compulsory.

Financial Action Task Force (FATF) Involvement

The recent visit of a FATF team to India underscores the global concern over money laundering and terror funding. With over a decade since the last evaluation in 2010, the FATF is evaluating India’s AML preparedness. The trade body, representing 9,500 jewellers and diamantaires, assured the FATF that a framework is being established with local banks to restrict firms using overseas shell companies for trade from accessing export credit and working capital.

Export Credit and Working Capital Challenges

Indian firms engaging in cross-border trades involving precious stones and metals could face difficulties accessing export credit and working capital if they fail to comply with UBO disclosures. The state-owned Export Credit Guarantee Corporation (ECGC) has taken a proactive stance by demanding UBO details for credit risk insurance, potentially influencing the regime linking bank credit with UBO details of offshore counterparties.

Gold Smuggling Concerns

The issue of gold smuggling emerged during interactions with the FATF, but unlike in some other countries, the surge in smuggling in India is attributed to higher import duties rather than financing terrorism. This distinction is crucial in framing policies to address smuggling concerns without adversely impacting the legitimate trade of precious metals.

Global Implications

While the FATF’s findings are not backed by statute, they can influence international investors’ capital allocation decisions. A country on the FATF grey list or under enhanced monitoring risks losing out on vital hard currency inflows. The ongoing assessment coincides with regulatory actions taken by the Securities & Exchange Board of India (SEBI) to enhance UBO disclosure regulations for foreign portfolio investors.

Legislative Strengthening

India’s legislative framework against money laundering has been fortified through acts like the Prevention of Money Laundering Act and the Unlawful Activities (Prevention) Act, 1967. Recent amendments and notifications have expanded the scope of reporting entities, including professionals like chartered accountants and company secretaries, under the PMLA for certain transactions carried out on behalf of clients.

Conclusion:

As India takes significant strides in fortifying its AML framework, the jewellery trade is at the forefront of efforts to ensure transparency and curb illicit financial activities. The collaboration between industry bodies, banks, and regulatory authorities reflects a commitment to safeguarding the integrity of cross-border trades involving precious stones and metals.