It also recommended that New Delhi should work towards becoming a full-fledged member of Financial Action Task Force (FATF), an inter-governmental body for development of policies to combat money laundering and terrorist financing.
While noting that the Indian Parliament passed the Prevention of Money Laundering (Amendment) Bill, early this week, a US State Department report has suggested that India should make necessary legislative amendments to bring its anti money laundering and counter terrorism finance regime in conformity to FATF.
"Given the number of terrorist attacks in India and the fact that in India hawala is directly linked to terrorist financing, India should prioritise cooperation with international initiatives that provide increased transparency in alternative remittance systems," said the report in its section on India related to money laundering.
The report, released by Assistant US Secretary of State for International Narcotics and Law Enforcement Affairs, David T Johnson, quoted RBI estimates that remittances to India sent through legal, formal channels in 2007-2008 amounted to $42.6 billion.
According to Indian observers, the report said funds transferred through the billion dollar hawala market are equal to between 30 to 40 per cent of the formal market.
“In that case the hawala market could amount to between $13 billion to $17 billion,” the report on International Narcotics Control Strategy, said.
Given the large number of expatriates, India continues to retain its position as the leading recipient of remittances, according to the World Bank.
India’s strict foreign-exchange laws and transaction reporting requirements, combined with banking industry’s due diligence policy, makes it difficult for criminals to use formal channels to launder money, the report said.
However, large portions of illegal proceeds are often laundered through “hawala” or “hundi” networks or other informal money transfer systems.
The report appreciated the steps taken by India post 9/11 with regard to money laundering and its possible use by terrorist network. However, several key steps are still required to be taken by New Delhi, it felt.
Listing out the steps New Delhi still needs to take, the report said India should become a party to the UN Conventions against Transnational Organized Crime and Corruption.
“Also, India should pass the Foreign Contribution Regulation Bill for regulating nongovernmental organisations including charities,” it said.