Tackling Money Laundering in NGO Sector in India

Non Governmental Organisations in India were used as the vehicles of money laundering in India for decades

Nonprofit organizations have always caught the attention of philanthropists as well amusement of thieves. In this context, the formation and operations of Nonprofit organizations (NPO’s or NGO’s as they are popularly referred to in most nations) has been a “Double edged sword”, they have either contributed the ‘society’ at large socially, economically or culturally and sometimes assisted the “Anti social elements” as vehicle of illegal money conversion.

Nevertheless, fringe elements using the same for anti-social activities doesn’t demean the purpose for which the genuine NPO’s were/are formed. However it becomes necessary that all these NPO’s be monitored for the source of their funds, its utilization for purposes for which they were formed and the persons who carry out these activities.

The Financial Action Task Force, the intergovernmental body, has therefore paid special attention to the NPO realizing the “grey areas” in NPOs, FATF has given this recommendation 8, “Combating abuse of Non Profit Organisations”.

NPO definition

A legal person or arrangement or organization that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of “good works.

This is line with Recommendation 1; i.e on the basis of risk assessment.

The four pronged approach envisaged involves:

  • Outreach to the NPO sector concerning terrorist financing issues
  • Supervision and monitoring of NPO sector
  • Effective information gathering and investigation
  • Effective capacity to respond to international requests about an NPO of concern.

Additionally, countries must also ensure that NPO falling under this definition should additionally satisfy Recommendations 24 and 25, on transparency and beneficial ownership of legal persons/ arrangement.

NPO’s in India historically

A very crude definition of Non profit organization is any association formed for the common benefit of its members. Therefore, the history of such associations is tracked back to the pre-independence period in India. During the British rule in India, several nationalists gathered other citizens together and activities of social welfare and basically upliftment of people to fight for their freedom began, they were associations whose motive for was not to earn profits, thus beginning the era NPO’s in India.

NPO’s meaning India

They are legal entities formed for promotion of charitable activities (education, art, culture, music, sports, religion and any public utility) which are non-commercial in nature (whose purpose is not to derive profits from activities) and whose intention is common good of members/people who are a part of it.

Ways in which NPO operate in India

In India, NPO’s could be formed in the following ways:

  1. Societies as Societies Registration Act of 1860: Usually formed for social awareness and healthcare.
  2. Trusts as per Trust Act, 1882: major chunk of educational, medical and religious organizations.
  3. Section 25 Companies as per Companies Act, 1956 (New Section 8 of Indian Companies Act, 2013)

Other laws applicable to NPO’s

In most cases, if the trusts are religious in nature they would be again subject to

  1. Wakf Act, 1995 : Covering muslim trusts and immovable properties thereon.
  2. Charitable & Religious Trusts Act, 1920
  3. Sikh Gurudwara Act, 1925
  4. Religious Endowment Act, 1863.

For NPOs receiving foreign funding for permissible reasons, with special consent from MHA: Ministry of Home Affairs, the regulation would be Foreign Contribution (Regulation) Act, 1976.

Benefits accruing to NGO’s

  • Flat 15% Income Tax Act, 1961 allowable as deduction from the self income of the NPO and option to carry forward unspent profits to the subsequent years with prior permission
  • For contributors under Income Tax Act, 1961 a “Deduction” available under Section 80G.
  • Contributions made by donors with specific instructions do not form income of the NPO and is retained as “Corpus Fund”.

Critical cases of NGOs being misused

The Anna Hazare movement, backed by India Against Corruption an NGO was widely hailed by Indian public and world at large, however what followed was inquiries wherein there were questions raised about, sources of funds of donor companies that were either non-existent/defunct, amounts were utilized for purposes that they were not supposed to etc.

Most of the NPO’s formed in the smallest parts of the country are managed by Politicians and/or their kin, so likely chances of trust and its resources being misutilised for political gains.

The burning issue in the nation of “Ghar Wapasi”, i.e illegal conversions, is also on account of some religious trusts gathering foreign funding to propagate specific religion and solicit the poor for converting their religion, which has a deep; socio-geo-political impact.

Infact, the CAG: Comptroller & Auditor General of India, the apex auditor of the country has stated that, the benefits given to trusts have been used for tax evasion or have been safe havens for criminals to deposit their illicit wealth and be scot free.

What has India Done ?

There have been safeguards in place like compulsory annual audits of accounts of such NPOs, mandatory filing of returns,etc.

Being a part of FATF now, India has accorded the Recommendation 8, into reality. Indian FIU IND has prescribed a separate report for Reporting Entities (Comprising Banks, Insurance cos, Stock market intermediaries) for filing details of transactions carried out by NPO’s.

NTR: Not For Profit Transaction Report

A separate report is prescribed for NPO’s, the statement of intent being

  • All transactions involving receipts by ‘non-profit organizations’ (accounts) of value more than rupees ten lakhs or its equivalent in foreign currency should be filed every calendar month with FIU IND before 15th of the succeeding month.
  • The report is a monthly report to be filed.
  • Its basis is the credit (deposits) in the account exceeding INR 10 lakhs (1 million Indian Rupees)
  • What type of accounts will be covered?
  1. T: Trust
  2. A: Association
  3. S: Society
  4. C:Clubs

This report is to be filed by every reporting entity in the following manner:

  • Electronically in .xml format according to the schema of FIU IND by online uploading into the FIU IND’s FINNET Gateway Portal.
  • Each NPO account has to be reported separately, i.e preferably in a single batch using “Report Serial No” logic.
  • Transactions must be reported along with details of authorized signatories (individuals connected to the account) and beneficial owners.

NTR: EFFECTIVENESS

NTR furnished by the RE’s is an important step in the overall Anti Money Laundering regime of India. The details of such accounts filed with FIU IND are disseminated to various regulatory authorities and LEA: Legal Enforcement agencies for evidence or investigation purposes.

Some Lacuane

  1. The NTR returns in India are primarily filed by banks only, only 1.1% of NTR’s being filed by RE’s other than banks.
  2. There is no official national data portal for verification, identification of NPO’s.
  3. There is no clarity of reporting in cases of temporary associations like, Festival Committees during festivals which are unregistered however voluminous funds get collected.

Tackling Money Laundering in NGO Sector in India

Although the reporting for NGOs in India is under primitive stages, its an achievement in itself that reporting is commenced. Numerable legislations pertaining to NGO’s, vast diversity in NGO area of operations and activities, lack of clarity in reporting coupled with heterogeneous reporting by RE’s has not deterred the spirit of compliance.

FIU IND is making efforts to bring clarity as well as seek NPO information by notices and prosecution to erring RE’s.

As they say,

The woods were lovely dark and deep,

We have miles to go before we sleep and miles to go ………