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'Electoral Bond Scheme Contrary to PMLA, Favours Ruling Party': Coalition Report Tells FATF

The report, compiled by anonymous civil society actors calling themselves the Global NPO Coalition on FATF, looks at the complex threat that the electoral bond scheme poses in a democracy. 
Representative image of Indian currency notes. Photo: rupixen.com/Pixabay

Mumbai: Making a case for inclusion of the electoral bond scheme within the framework of the Financial Action Task Force (FATF), the Global NPO Coalition on FATF in its recent report claimed that the nameless nature of the electoral bonds courts a significant risk of money laundering and corruption, along with a violation of citizens’ constitutional right to know of favours to the ruling party.

The report, compiled by anonymous civil society actors, looks at the complex threat that the electoral bond scheme poses in a democracy. 

The FATF, an intergovernmental organisation established in 1989 by the Group of Seven (G-7) countries, leads a global action to tackle money laundering, terrorism and proliferation financing. Its Mutual Evaluation Review (MER) is scheduled today, November 3, to evaluate anti-money laundering laws and financing of terrorism in India.

The coalition, along with its other study on India’s attempt to weaponise terror laws, is pushing the intergovernmental organisation to look into the threats posed by the electoral bond scheme in the country. 

The report and the FATF meet also comes at the time when the Supreme Court, after a three-day hearing starting October 31, reserved its verdict in the batch of pleas challenging the legal validity of the electoral bonds scheme that allows anonymous donations to political parties. 

“[The] electoral bond scheme is not merely opaque and non-transparent but opens a floodgate for money laundering through legal means,” the report argues. The anonymity that the scheme allows leads to “mysterious and indefinite donations which will be impossible to track down”, the report says. 

The Global NPO Coalition only reiterates what the Reserve Bank of India has already flagged way back in 2017. In a letter addressed to the Union finance ministry, the RBI had objected to the introduction of a electoral bond scheme on the ground that it does not disclose the identity of the intervening persons/entities buying the bonds and, therefore, the said scheme will affect the principles and spirit of the Prevention of Money Laundering Act (PMLA). 

Emphasising the money laundering risk, the then Governor of the RBI wrote a letter stating “electoral bonds in physical form may exchange hands several times before reaching the political party, which would leave no trail of the transactions and in the process of providing anonymity to the contributor and to the political party, anonymity will be provided to several others in the chain of transfer of the electoral bonds. This can render the scheme open to abuse by unscrupulous elements”.

Similar concerns were raised by the Election Commission of India in 2018. In a separate letter addressed to the Ministry of Law and Justice, the ECI had stated:

“This (electoral bond) opens up the possibility of shell companies being set up for the sole purpose of making donations to the political parties, with no other business of consequence having disbursable profits”. The government not only overlooked these warnings but the minister of state for finance allegedly lied on the floor of the parliament that the ECI had not raised any concerns regarding the electoral bond.

The Global NPO Coalition has found specific violations of the FATF, it says in the report. The ‘Recommendation 3’ of the FATF requires countries to take effective measures to criminalise money laundering and give a wider meaning to the offence by including predicate offences. Recommendation 3 also designates counterfeiting currency as a predicate offence for money laundering. The report states that the anonymity granted to the donor in the electoral bond scheme clearly violates the FATF’s recommendation. 

FATF, in its report ‘Money Laundering and Terrorist Financing Related to Counterfeiting of Currency’, notes that counterfeiting is also a growing method of terrorist financing. Criminal groups have been active in using their covert network to introduce counterfeit currency into the financial system. The electoral bond, through its opaque design is prone to the risk of counterfeiting and channelling of illicit money in India’s financial system, the Global NPO Coalition claims.

The Coalition has recommended a complete abrogation of the Electoral Bond Scheme, 2018, along with its suspension until the apex court passes its verdict. 

Corruption, although not explicitly covered by the FATF, time and again concerns have been raised and acknowledged by the intergovernmental organisation. The FATF also acknowledges the risk of money laundering through politically exposed persons, with the NPOs coalition points makes it binding on the government to make the identities of the funding identities (to the political parties) public.

The electoral bond scheme, the report finds, also curtails an individual’s constitutional right to know and in this case- right to know your candidate.  A citizen can make an informed choice based on the full and complete information about their candidate’s credentials which includes their source of funds. But electoral bond doesn’t allow such disclosure. 

Other acts amended, ruling party ’empowered’

Earlier, the Companies Act, 2013 (‘Companies Act’) and Representation of People’s Act, 1951 (‘RP Act’) mandated the political parties to reveal the details of their donations. But as the electoral bond scheme came into being, both the Companies Act and the Representation of People’s Act were amended making it “completely opaque” and the information about the donor of the bonds and the source of their donations is not revealed.

This amendment virtually rendered the ECI powerless, as it no more has “the power to seek information about donors of the bonds from political parties,” the Coalition finds in its study. 

The Coalition has also boldly inferred that the electoral bond scheme favours the ruling party.

It states, “While no information regarding the electoral bonds is provided to the citizens, the said anonymity does not apply to the government, which can easily retrieve the donor details.” The practice, the report says, is that “the enforcement agencies is frequently misused by the ruling party to achieve political goals”.

Additionally, the banks are largely under the control of the Union finance ministry, therefore, the details of the donors can also be accessed by the ruling party. This “exclusive access to the donors’ details”, the Coalition says, “allows the ruling party to track donations made to opposition political parties and arm-twist donors, and force them to make donations to the ruling party only, creating an uneven playing field”.

Among other issues, the electoral bond scheme also facilitates foreign funding within Indian electoral processes, which is not permissible under the law, the report has found.

Section 29B of the Representation of the People Act prohibits political parties from accepting political donations from foreign sources. In 2014, the Delhi High Court found both the BJP and the Indian National Congress guilty of accepting donations from foreign sources in violation of Section 2 (e) of the erstwhile Foreign Contribution (Regulation) Act, 1976. But interestingly, to bypass the said judgment and to further facilitate political donations from foreign sources, the electoral bond scheme promptly amended the provision relating to foreign donations under the Foreign Contribution (Regulation) Act, 2010, with retrospective effect i.e. 1976.

The Coalition, in its report comments, “It is pertinent to note that the electoral bond scheme as it stands today facilitates foreign companies to make donations through their subsidiary companies in India, but in the absence of such an amendment, the judgment of the Delhi High Court would have been binding, and political parties would have faced punitive consequences.”

As a part of its recommendation, the Coalition has sought risk assessment of the electoral bond scheme and assessment of the threat of money laundering, terrorist financing, corruption and other threats of flow of illicit money through the scheme. 

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