How to Curb Money Laundering? Modi Govt. seems to be taking a Methodical but Slow approach

Biju Janata Dal (BJD) floor leader in the Lok Sabha Bhartruhari Mahtab is one of my favourite lawmakers in Parliament. He raised a pertinent question in the lower house of Parliament on April 29, 2016 during question hour and wanted to know if in the wake of reports from SIT and other agencies, the government is proposing any changes in the law to keep an eye on tax evaders.

"....has SIT suggested what new law is to be enacted which will minimise the creation of black money in the country?" he asked.

A smart question and was handled with equal smartness by the Minister of State for Finance, Jayant Sinha – who actually skipped a direct reply. The reasons are many. But the government seems to have started work on this front as well.

In an attempt to prevent ill-gotten money from leaving the country’s shores, the government has asked its economic offences agencies to study the loopholes in the country’s banking laws, according to well-informed sources. With the quantum of black money held by Indians abroad variously estimated at between $466 billion and $1.4 trillion, the idea is to get a fix on how the network operates. 

                                 

Pervading secrecy, cut-throat competition among private and international banks, along with the organised crime models, have all resulted in giving a boost to money laundering both in India and abroad. A large number of foreign and private banks operate in secrecy. In Switzerland and Cyprus, dirty money is often pumped to their financial system via organised channels. Privacy is at the core of the functioning of private banks. So the government is left with few options when it wants to crack down on leads. 

"There is a competition, a number of foreign and private banks also operate in secrecy and jurisdictions like Switzerland. Often dirty money is pumped in financial systems through organised channels, deposit wires and unlawful proceeds," a source said.

Preliminary reports from agencies and departments under the union finance ministry have already reported  that private banks in good number of case studies have failed to show that they have "intimate knowledge" of their clients.

"A multiple layers of secrecy help clients to mask their accounts and transactions," the source said.

A simultaneous directives from the Home ministry and Finance ministry was given to various security agencies last year to study these offences. The departments like Enforcement Directorate, Serious Fraud Investigation Office (SFIO) and Customs and other Indian agencies were asked to study whether and how "pervading secrecy" in the operations of private and foreign banks have contributed to promote money laundering at some quarters.

Snap: Nirmal Deb(Facebook)

Subsequently all these agencies and departments are trying to figure out how some of the existing "weaknesses" in laws are being used by unscrupulous elements for such activities. 

"Private banking industry's basic functioning is marred by a culture of pervading secrecy. And government has fewer options to crack some of the information," a preliminary finding revealed. The sources explain that money laundering involves multiple transactions to disguise the source of financial assets. 

Moreover, money laundering offers challenges to law enforcing agencies both in India and overseas countries as it is "group activity" like organised crime and caters to long term interest and is "most often continuing in nature" with far off and deep reach. These make task of trailing these money very difficult more so in a world of cut throat competition as banks face dual pressures of rivalry and expansion and thus the banks cannot impose strong anti-money laundering rules on their clients.

In this context, another key central government agency in a 100-page report to the government has said that after September 2001 while international response to underground economy has been well coordinated, many countries are still clueless about what to do with off-shore banking havens in Cyprus, Cayman Islands and the Netherlands Antilles. The law enforcing agencies, sources admit, are also confronted with a herculean challenge in the form of cyber mafia. "The power of internet has made it too easy for offences like phishing to flourish," the source said.

Officials said a comprehensive study can also help in understanding how the flow of such money can be curbed while also equipping banks to have a strong anti-money laundering rules for clients, backed by law.

During the latest US visit of Finance Minister Arun Jaitley, coordination and cooperation among various countries to curb money laundering was at the core of his itinerary. Even at the special session of the US on drugs, he dwelt on the nexus between illicit money, drugs and terrorism. India also wants to give inputs to the Organisation of Economic Cooperation and Development to be able to come up with objective criteria soon to identify jurisdictions that did not cooperate towards a transparent financial system.

The setting up of Serious Fraud Investigation Office (SFIO) was a crucial step in 2003 during the Vajpayee government. Functioning under the ministry of company affairs, SFIO has done quite a good job vis-a-vis shell companies those are floated only to route fund without doing realtime business. 

In fact the SIT on black money set up by the Modi government in May 2014 could detect with the help of SFIO that over 300 addresses show at least 20 companies "operating from the same place". Over 77,000 companies were found violating the norms relating to directorship.

Minister of State for Finance Jayant Sinha informed members that the appointment of a Special Investigation Team (SIT) by the National Democratic Alliance (NDA) government in 2014 had helped in the purpose of tracking black money both in the country and outside. "SIT is doing a commendable job," he said, adding that recommendations of the SIT had helped investigating agencies and the government, especially with regard to black money stashed overseas. "We have received a wide set of recommendations from the SIT. The recommendations have been included and efforts have been undertaken through the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, which was passed in this august House. This has resulted in a certain level of compliance. "There has been a series of investigations and it is because of disclosures which we got through HSBC as well as through the International Committee of Journalists and most recent has been the Panama Papers, as finance minister has indicated, notices have already been sent out," Sinha said.

He said as far as domestic black money is concerned, a number of suggestions have been provided there including the disclosure of PAN card for transactions of Rs.2 lakh, restrictions on real estate, and so on which have been implemented.

(ends)