About the author: Vivaan is a student in Grade 12 at The International School Bangalore. He is passionate about business, economics and biology. He aspires to become an entrepreneur and create ventures fields of healthcare and sustainability.
Abstract
This paper examines the complex relationship between foreign remittances and money laundering practices in India. With India being one of the largest recipients of remittances globally, the influx of foreign funds plays a critical role in the nation’s economy. However, the remittance system also presents vulnerabilities for exploitation by illicit actors involved in money laundering. This study explores the mechanisms through which foreign remittances are used to facilitate money laundering, highlighting key risks associated with informal and unregulated channels. It further analyses the effectiveness of India’s existing regulatory frameworks, including the Prevention of Money Laundering Act (AML) efforts while investigating policies that ensure legitimate remittances continue to contribute positively to the economy.
Introduction
The Indian diaspora is a global dispersion of people of Indian origin, active in various fields, involved in connecting different cultures, and contributing economically and culturally worldwide. Individuals of Indian origin have made substantial contributions to the economies of both their host nations and India. In the context of this paper, worker’s or migrant’s remittances refer to the money that is earned by individuals working in foreign countries, which is sent back to their home country, usually to support their families or for personal savings (Bartlett, 2002). These transfers play a significant role in the development of economies, providing a stable source of income which increases with continued emigration to other countries.
India has long been one of the world’s largest recipients of foreign remittances, with millions of its citizens working abroad and sending substantial financial contributions back to their families (Mugo, 2015). These remittances form a critical part of India’s economy, significantly bolstering household income, alleviating poverty and fostering local development. In 2021 alone, India received over $87 billion in remittances, underscoring the importance of these inflows in supporting domestic consumption and sustaining economic growth (Chintamani, 2017). Remittances from the Indian diaspora serve as a critical part of India’s economic development by providing financial support to families and contributing to the nation’s foreign exchange reserves. Additionally, the diaspora’s presence in sectors like technology, finance, and academics, has driven innovation and economic development in various host countries (Jayasekara, 2023).
Remittance inflows to India have been increasing constantly since the 1990’s to have reached a sum of $125 billion in 2023, a 12.3% growth from the previous year 2022, which brought about $111.2 billion in remittances (Hendriyetty & Grewal, 2017). The predicted outcomes for growth in 2024 suggest that the remittance inflows to India and other Low- or Middle-Income countries (LMIC’s), may soften further to 3.1% based on a trajectory of weaker global economic activity. However, some studies show that the growth of remittances to India will dampen to 8%, which would lead to an increase of remittance inflows by 8% as compared to 3.1%, to $135 billion for the fiscal year 2024 (McCusker, 2005). Moreover, projections of a compound annual growth rate (CAGR) of 11.9% in the inbound market from 2023 to 2028 suggest that the sum of remittance inflows to India for the year 2028 may reach an amount of USD $195.3 billion (Kashyap, 2021). By balancing notions of economic development with security concerns, this research provides a comprehensive view of the policy challenges and potential solutions in safeguarding India’s financial integrity.
Impact of Remittances on India
Alongside significant economic benefits, foreign remittances also pose considerable regulatory challenges. The vast movement of funds across borders creates opportunities for illicit financial activities like money laundering. In India, both formal and informal channels of remittance such as banks, money transfer services and the widely utilized hawala system present varied vulnerabilities that can be exploited by criminal actors to launder proceeds from illegal activities (Bowers, 2008). The misuse of these remittance systems threatens the integrity of India’s financial system and also compromises the efficacy of efforts to combat corruption and terrorism financing.
Remittances can be transferred through formal and informal channels. The network of cross-border remittance transfer entities in India mainly constitutes formal funds transfer entities like banks, money transfer operators (MTOs) and other non-bank entities. Other informal agents include Hawala dealers, returning migrants and trading and transportation companies (Khan & Siddiqui, 2021). As per the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA), ‘hawala’ transactions are an illegal means of remittance transfer to India. This is because the Reserve Bank of India (RBI) does not recognize transactions carried out by unauthorized persons under the RBI (Kumar, 2015). Informal channels of remittance transfer, however, are mostly legal though discouraged due to the lack of transparency involved in these transactions (Shehu, 2004).
Within India, bank and non-bank entities permitted to undertake cross-border remittance transfers are commercial banks called authorized dealers (ADs), public-owned financial institutions, post offices, and exchange bureaus. Money Transfer Operators (MTOs) are companies that provide remittance services with the help of a wide network of agents, ATMs, and electronic transfer channels. Money transfer operators in India are regulated by money transfer service schemes, which are designed especially for the transfer of low-value remittances to the country for family maintenance purposes. They tend to use online formats for remittance transfer like direct transfers to bank accounts or debit/credit card-based transfers (Kundu, 2019). The most used method of financial transfers to India is the use of electronic wire transfers, which are conducted by third party operators like banks and other wire transfer service providers. Another popular means of transfer is the use of bank cheques, which is sent through mail to the recipient in India and can later be cashed in with the bank.
Formal methods of remittance transfer may pose inconveniences that motivate individuals to resort to informal means that are less transparent and do not reflect on official inflow reports. These problems are the lack of time efficiency and high transaction fees imposed on the transfer of remittances. Informal channels, which are generally perceived as efficient in terms of cost, time and documentary requirements, are thus an attractive alternative to formal means.
A misuse of remittance inflows, namely the lack of expenditure of the received remittances on activities that may promote economic growth in the short or long term, can lead to a vicious circle which negatively impacts the country’s economy. This happens when citizens tend to spend their remittances on luxuries and demerit goods instead of education and healthcare (Ahmed, Mughal & Martínez‐Zarzoso, 2021). Additionally, the vicious circle as a byproduct of workers’ quitting jobs due to high remittance inflows, which leads to higher wages, leading to upward pressures on prices, which decreases the price competitiveness of goods exported by the country, leading to a depreciation in the currency, and higher remittances coming in, which further leads to workers’ quitting employment positions (Maimbo, 2004). This forms an unending circle which devastates an economy.
Money transfers are so common in the remittance system that transactions may carry risks such as money laundering or even terrorist financing. Digital money transfers provide various criminal opportunities and thus, these must be carefully monitored to prevent illegal activities. The development of fast and convenient new services to transfer remittances provides even higher risk, and institutions like the Financial Action Task Force (FATF) and The Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) have been established to enforce Anti-Money Laundering compliance in the remittance system (Thouez, 2005). Suspicious transactions may be monitored through algorithms which highlight abnormal transactions and methods like Know Your Customer (KYC), which verifies the user’s identity.
Current Landscape and Policy Recommendations
Effective public policies implemented to regulate and control remittance inflows should aim to simplify regulations and procedures for easier remittance transfer, drive down transaction fees, increase financial literacy to promote effective use of remittances, help support economic development in the long term and address the misuse of remittances and illegal acts like money laundering. Policies implemented to regulate remittance inflows to India aim to make the market for remittances more transparent, secure, accessible and popular. For instance, the Liberalized Remittance Scheme (LRS) allows all resident individuals, including minors, to freely remit up to USD 2,50,000 per financial year for any permissible current or capital account transaction or a combination of both. Despite its potential, there’s been an overdependence on this scheme, which has overshadowed minor channels, allowing room for misuse.
However, remittances for trading in foreign exchange abroad, remittances to countries identified by the FATF as ‘non-cooperative countries and territories’, remittances to individuals and entities identified as posing risk of committing acts of terrorism, and remittances for purposes specifically prohibited under Schedule-I (like the purchase of lottery tickets/ sweepstakes, proscribed magazines, etc.) and any other items are restricted as per Schedule-II. The overdependence on this scheme, means that other policies in use are overshadowed by this scheme. Moreover, the lack of enforcement and vigilance can result in loopholes like the approval of remittance transfers which may be misused by the recipient for a variety of activities. This leads to a debate on possible solutions which can be implemented to eliminate problems and unethical use of this policy.
The Reserve Bank of India’s Real Time Gross Settlement (RTGS) provides instant and secure remittances. But its reach is compromised due to a lack of rural penetration. It can be explained as a system where there is continuous and real-time settlement of fund-transfers, individually on a transaction-by-transaction basis. It is a safe and secure system for funds transfer (Anima, Nath & Dalia, 2023). Additionally, the receiving branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The receiving bank must credit the beneficiary’s account within 30 minutes of receiving the funds transfer message. This makes the RTGS one of the fastest ways of transferring remittances into India. However, accessibility in rural areas is an issue with this method of remittance transfer due to lack of facilities and banking institutions coupled with uneducated populations in these areas (McCusker, 2005).
Another payment service is the Aadhaar Enabled Payment System (AEPS) which allows a bank customer to use Aadhaar as his/her identity to access his/her Aadhaar enabled bank account and perform basic banking transactions like balance enquiry, cash withdrawal, and remittances. Linking Aadhaar IDs with bank accounts enables secure and efficient domestic fund transfers, facilitating remittance transactions in rural areas. This makes the remittance transfer process more accessible in small rural areas which have decreased access to banking services and electronic systems, eliminating the problems associated with RTGS. Other policies may include skill development programs which equip Indian workers abroad with relevant skills, potentially increasing wages and remittances sent back home.
While remittances substantially help the Indian economy, contributing to foreign exchange reserves and income, they may also cause problems. They may accidentally allow issues in remittance flows, which can lead to economic imbalances. More importantly, the presence of informal channels poses some significant risks, including money laundering and financing of unethical, illegal activities like terrorism. These channels evade the formal banking system, complicating the enforcement of regulatory policies and undermining the effectiveness of these policies designed to manage remittance inflows.
To regulate the impact of foreign remittances on money laundering in India, a combination of policy interventions and regulatory measures can help mitigate risks while ensuring remittance flows remain beneficial to the economy (Hendriyetty & Grewal, 2017). To fix issues arising from the current remittance landscape in India, smart solutions are essential. For this purpose, strengthening coordination between financial regulators and law enforcement is a crucial step in effectively regulating the impact of foreign remittances on money laundering in India (Siddiqui, 2004). Such coordination allows for better intelligence sharing, streamlined enforcement actions, and a more unified response to complex financial crimes.
Financial regulators such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Financial Intelligence Unit-India (FIU-IND) collect valuable data on financial transactions, suspicious activities, and compliance violations (Khan & Siddiqui, 2021). When regulators and law enforcement pool their resources, they can create detailed profiles of individuals or entities involved in suspicious remittance transactions. This improves the ability to track the flow of illicit funds and investigate criminal networks linked to money laundering. By sharing this data in real-time with law enforcement agencies like the Enforcement Directorate (ED) and Central Bureau of Investigation (CBI), patterns of illegal remittance activities can be detected earlier (Shah, 2023).
Coordinated efforts between financial regulators and law enforcement allow for more effective monitoring of high-risk remittance corridors (such as those between India and countries with high diaspora populations like the UAE and Saudi Arabia). Financial regulators can conduct targeted audits of money transfer operators and financial institutions based on intelligence provided by law enforcement agencies, thereby uncovering illegal remittance channels and money laundering operations (Bartlett, 2002). Through coordinated actions, both regulators and law enforcement can stay ahead of new tactics used by money launderers. For example, if law enforcement identifies a new money laundering technique involving cryptocurrencies, regulators can quickly issue guidelines to financial institutions and remittance providers to tighten their controls.
Additionally, incentivizing the usage of formal channels for remittances by offering reduced transaction fees or tax benefits may encourage migrants to stay away from informal transfer methods. Informal channels like hawala are popular partly because they offer lower transaction fees than formal financial institutions (Trautsolt & Johnsøn, 2012). By reducing the cost of sending money through formal channels—such as banks, licensed money transfer operators (MTOs), or digital wallets—the government can make these options more attractive (Passas, 2015). This eliminates one of the primary reasons people turn to informal methods, which typically have minimal to no upfront fees. Offering government subsidies or discounts on transaction fees for formal remittance transfers would further reduce the cost gap between formal and informal methods (Singh & Hari, 2011). For instance, if remittances are processed at a flat rate or reduced percentage fee, senders would be less inclined to use hawala, which could also charge hidden costs or lead to financial risks.
Conclusion
This research paper investigated the intersection of foreign remittances and money laundering practices in India. It examined the channels through which remittances flow, the risks associated with informal mechanisms, and the loopholes in current regulatory frameworks that allow money laundering to thrive. This study aimed to provide a comprehensive analysis of India’s policy responses to this issue and offered recommendations on how to enhance anti-money laundering efforts (AML) while maintaining the positive economic contributions of foreign remittances. Addressing this dual challenge is vital for ensuring both the security of India’s financial system and the continued socio-economic benefits that remittances bring to millions of Indian households.
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