Published on December 23, 2014
“Earth provides enough to satisfy every man’s need, but not every man’s greed.” — Mahatma Gandhi
Money becomes the sole reason for the destruction and ruin of individuals and families when its desire transforms into an unending obsession for its maximum possession. One of the forms of indulgence towards satisfying this unlimited hunger is money laundering, the process of creating the illusion that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.
In a recent case of money laundering in India, the National Spot Exchange (NSEL) investors forum’s allegations of a conspiracy between (NSEL) and 24 defaulting companies with the default amounting to Rs 5,600 crores prompted a probe by the enforcement directorate. NSEL went bankrupt on 13 July 2013 after the government ordered its shutdown for violation of norms. This was followed by the exchange defaulting on its payment obligations that resulted in inconceivable monetary loss to around 13000 of its investors. Investigations revealed that this massive operation was carried out with help from IBMA (Indian Bullion Market Association) which was 60% owned by NSEL.
The help extended by IBMA was in clearing trades for large a number of its trading members. It was found that most of the underlying commodities never existed and buying and selling of commodities like Steel, Paddy, Sugar, Ferrochrome etc. were being conducted only on paper. It was further discovered that a majority of the board minutes of NSEL were fabricated as the mobile locations of board members did not match. Some of the warehouses mentioned on NSEL website did not exist and even the SGF (Settlement Guarantee Fund) which was supposed to be about Rs 839 crores (about $ 140 Million) as on 29 July 2013 vanished into thin air. About 24 borrowers who were given the funds by NSEL without any underlying commodity deposited by them turned out to be related to each other. One of the borrowers who had taken away around Rs. 1000 Crores was NK protein Ltd, owned by the son-in-law of ex-chairman Shri. Shankarlal Guru. Shalini Sinha, wife of the sacked CEO and MD of the company, Mr. Anjani Sinha though being a related party traded on Multi Commodity Exchange of India Limited (MCX) for about Rs 40000 crores in a year through her company SNP Designs P Ltd.
What followed was an elaborate investigation and conduct of several raids by the EOW (Economic Offences Wing) of the Mumbai police. Acting on an FIR (First Information Report) filed against the directors of the NSEL, and the directors of their promoters, Financial Technologies India Ltd (FTIL), along with various other brokers allegedly involved in the fraud, several arrests were made including those of sacked CEO and MD of NSEL, Mr. Anjani Sinha on 17 Oct , 2013 and the Chief of FTIL Jignesh Shah along with Shreekant Javalgekar who were believed to be the masterminds of the scam on 7 May 2014. Mr. Jignesh Shah is out on bail at present. Further police investigations and judicial proceedings continue.
The procedure of money laundering involves three phases beginning with the placement or introduction of illicit money into the financial system followed by layering or the carrying out of complex financial transactions in order to camouflage the illegal source and concluding with integration or acquisition of wealth generated from the transactions of these illicit funds. Money laundering makes it viable for money generated through criminal activities to be transformed into clean currency so that it may be used in furtherance of new activities of similar nature.
In early 2013, a sting operation conducted by cobrapost.com, an investigative online news provider, exposed certain irregular activities of three major banks – Axis, HDFC and ICICI. It was discovered that they were encouraging customers to evade income-tax payments, siphon off funds overseas and alter politicians’ ill-gotten gains into legally sourced wealth.
Numerous suggestions of a very imaginative and brazen variety were offered to the sting operators who approached these banks in the guise of customers in need of legitimizing their unaccounted earnings. Some of them included: (a) Accept huge amounts of cash and either invest it in insurance products or gold or open an account to route it into various investment schemes of the bank without the mandatory PAN card or adhering to the KYC norms laid down by RBI, (b) Split the money into tranches to get it into the banking system without being detected,(c) create benami accounts to facilitate the conversion of black money, (d) Get demand drafts made for the client either from their own banks or from other banks to facilitate investment without it showing up in the client’s account, (e) Allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash and so on and so forth.
The banks in question also offered certain innovative services unique to them in this regard. For instance, HDFC Bank’s officials provided for the operation of lockers outside regular banking hours to ensure the secrecy of the customers’ identities and mask the nature of the transactions. ICICI Bank officials offered to make a suitable profile for the client, showing him as an agriculturist or engaged in some business to make his investment unquestionable. Axis Bank officials suggested depositing money into various accounts from where it will be routed into different investment schemes or for a fee, using accounts of other customers to transfer money abroad or avail services of a shell company in utilising a substantial amount of foreign currency as expenses toward business/leisure trips. The sting operation resulted in the immediate suspension of 20 officials of HDFC bank, 16 staff members of the Axis bank and 18 executives of ICICI bank.
Unrestrained laundering of money is also a foundation for the destabilization of the integrity of the nation’s financial systems. The global collection is found to form as much as 5% of the GDP which allows the beneficiaries of this process to threaten political stability worldwide. An in-depth study into this concept has revealed the following to be the main reasons for this immoderation: hiding wealth, avoiding prosecution, evading taxes and increasing profits. Robinson, Jeffery in his book “The Laundrymen: Inside Money Laundering, the World’s Third-Largest Business,” pg 4. Arcade Publishing, New York, 1996 gives a very ‘clean’ interpretation of the concept “Money laundering is called what it is because that perfectly describes what takes place – illegal, or dirty, money is put through a cycle of transactions, or washed so that it comes out the other end as legal or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income.”
The origin of this concept can be traced back to 4000 BC in China where, in his book “Lords of the Rim”, author Sterling Seagrave explains how the Chinese merchants would conceal their wealth from their rulers through investment in businesses in remote provinces or even outside China in fear of it being stripped off them and their ultimate banishment.
The term “money laundering” is also said to have originated at the time of the infamous American “gangsterism” as a mechanism for disguising large amounts of money generated by the import and sale of alcohol, gambling, extortion, prostitution, and other activities ejusdem generis that were prohibited. This was done by purchasing legitimate businesses, the legal earnings from which were combined with those earned against the law.
In India, money laundering has fairly benign origins in the hawala system. “Hawala” is an Arabic word meaning the transfer of money or information between two persons using a third person. The hawala system was an informal financial system which allowed people to execute financial transactions in confidence and secrecy. This system was perfectly legitimate, to begin with, and merely reflected institutional underdevelopment or unfamiliarity or lack of confidence in the formal banking system. However, these systems soon attracted criminal organizations, which began to use them along with other means in order to launder money to remove the taint of illegality. In 1991, an arrest linked to militants in Kashmir led to a raid on hawala brokers, revealing evidence of large-scale payments made to the tune of US$18 million to some of the country’s leading politicians including L. K. Advani, V. C. Shukla, P. Shiv Shankar, Sharad Yadav, Balram Jakhar, and Madan Lal Khurana. The prosecution that followed was partly prompted by a public interest petition filed by Vineet Narain, a fearless journalist who exposed this case in his newspaper kalachakra. However, the court cases of the Hawala scandal eventually all collapsed without convictions and many were acquitted in 1997 and 1998, partly because the hawala records (including diaries) were judged in court to be inadequate as the main evidence.
Money is laundered through air, land and sea. Airlines are used for currency smuggling because the smugglers can stay close to their money during the transportation process and destinations can be reached quickly and easily. Passengers can smuggle currency concealed on their person, in hand luggage or in unaccompanied baggage. In September 1992 federal and state authorities performed an outbound currency search of a commercial carrier’s crew members departing from New York, inbound to Colombia. A flight attendant was stopped and informed of the currency-reporting requirement. She declared a total of $1000. Upon examination of her hand-carried crew bag, a customs inspector found $2,600 in a roll of toilet paper, $12,400 in an envelope, $20,000 in a wooden box, $1,627 in her wallet, $5,000 in a carry-on garment bag, $40,000 in a box of laundry detergent and $13,300 in her jacket pocket. In total, she was carrying $95,541.
Smuggling currency across the land, although lacking in speed and the ability to reach many international destinations, is still a relatively easy way to transport cash. Customs presence tends to be less at outbound stations. Inspections tend to be infrequent as they interfere with the flow of traffic and at times cause massive traffic congestion. Another advantage of land border crossings is that vehicles needed to conceal the currency are easy to obtain. Customs officials have found currency in obvious locations such as seats, trunks, false compartments, dashboards and door panels.
Although smuggling by sea can have the advantage of reaching many destinations, it can, at times, be a cumbersome exercise. For example, it may require the use of other parties such as exporters or ship personnel and the smuggler may be physically separated from the currency for long periods. At the same time, however, smuggling by the sea offers certain advantages. The main advantage is that ship cargo typically involves large containers within which currency is very easy to conceal and difficult to detect. In one inspection, inspectors at New York seaport seized $763,240 that had been concealed beneath the floor of a refrigeration unit in a ship bound for Colombia
In India, the Anti-Money Laundering (AML) measures are controlled through the Prevention of Money Laundering Act, 2002 which entered into effect on 1st July 2005 with the objective of combating money laundering in India, confiscation and seizure of the property obtained from the process and identification and remediation of any other issue connected with money laundering in India. This statute was amended thrice post its enactment in 2005, 2009 and 2012.
The recent Amendment Act of 2012 comes as the most viable solution to this menace. Firstly, it enlarges the definition of the offence of money laundering to include activities such as concealment, acquisition, possession and use of proceeds of crime from criminal activities, thereby giving enough room to punish a person for merely possessing proceeds of crime regardless of value. For instance, when a father keeps his laundered money in his daughter’s bank account with the daughter not being aware of it, the possession of the tainted money by her becomes questionable. Secondly, it makes provisions for attachment and confiscation of the proceeds of crime even if there is no conviction as so long as it is proved that the offence of money laundering has taken place and the property in question was involved therein.
Thirdly, it provides the aggrieved with an opportunity to appeal against the orders of the Appellate Tribunal directly to the Supreme Court which comes as a major relief from the legal hassles of time and money. Lastly, prior to the amendment, money laundering crimes, with the exception of serious ones like terrorism, were tried only where the money involved was Rs.30 lakh or above. Post-2012 amendment however, this rule was modified to include even those offences that involved a considerably small amount of Rs. 10,000, acting as a lock on the doors that gave many sly launderers the chance to escape from the eyes of the law.
In my opinion as a legal professional in the field of business law, the introduction of the Amendment Act 2012 is a positive sign that will help to bring us to par with international standards and to obviate some of the deficiencies existing in the original act. It could prove to be an effective deterrent to large-scale money laundering in banking institutions and insurance companies. In the wake of the recent controversies regarding Indian black money stashed in international banks abroad, this Act becomes even more relevant.
Suhasini Joshi is a legal professional from India.