One Mr. Joseph Smith gave Karan US$
50,000 cash at some Middle east country. Karan operates a retail business (and
also performs remittance services for others). He will deposit his chunk
regularly with his banker as the proceeds of his business in shape of cash and
checks. He will justify these deposits to Bank/Tax officials as the proceeds of
his legitimate business. Even though, he might prefer it if reports were not
filed, he will not object to this as it would arouse suspicion at the bank (and
his business provides more than adequate justification). He may also use some
of the cash received to meet business expenses, reducing her need to deposit
that cash into her bank account. In the layering stage, the money launderer
manipulates the illicit funds to make them appear as though they were derived
from a legitimate source. A component of many layering schemes have been seen
to be the transfer of money from one account to another. Such activity is
called Hawala. Hawala transfers leave a sparse or confusing paper trail if any.
Even when invoice manipulation is used, the mixture of legal goods and illegal
money, confusion about `valid' prices and a possibly complex international
shipping network create a trail much more complicated than a simple wire
transfer. Now Karan has easily transferred the money from the Middle east
country to India and then drew it at the United States, apparently as
part of an investment in a business there. Such sham transactions are rampant
and thus eating into the sinews of the Indian economy.
In recent past, India has emerged as
an important regional financial center. It is facing an acute problem of large
informal cross-border money flows against the fictitious exports and under
invoiced imports resulting into tax avoidance. The large amount of FDI from tax
heavens has also come under suspicion. The situation exposes the country’s
vulnerability to money laundering activities. Some common sources of illegal
proceeds in India are narcotics trafficking, illegal trade in endangered wildlife,
trade in illegal gems (particularly diamonds), smuggling, human trafficking,
corruption, and income tax evasion.
Historically, due to its location
between the heroin-producing countries of the Golden Triangle and Golden
Crescent, India continues to be a drug-transit country. Money Laundering - An
Organized Crime: Money Laundering has a close nexus with organized crime. Money
Launderers accumulate enormous profits through drug trafficking, international
frauds, arms dealing etc. Cash transactions are predominantly used for Money
Laundering as the launderers facilitate the concealment of the true ownership
and origin of money. It is well recognized that through the huge profits, the
criminals earn from drug trafficking and other illegal means, by way of money
laundering could contaminate and corrupt the structure of the State at all
levels. This situation definitely leads to corruption. Further, this adds to
constant pursuit of profits and the expansion into new areas of criminal
activity. Through money laundering, organized crime diversifies its sources of
income and enlarges its sphere of action. The social danger of money laundering
consists in the consolidation of the economic power of criminal organizations,
enabling them to penetrate the legitimate economy. In advanced societies, crime
is increasingly economic in character. Criminal associations now tend to be
organized like business enterprises and to follow the same tendencies as
legitimate firms; specialization, growth, expansion in international markets
and linkage with other enterprises. The holders of capital of illegal
origin are prepared to bear considerable cost in order to legalize its use.
Causes of increase in Money
Laundering activities and inability to Control.
There are various causes for increase in Money Laundering and the
few of them can be enlisted as follows which is popularly known as ‘Features of
an Ideal Financial Haven’:
- Misuse
of corporate vehicles.
- No
deals for sharing tax information with other countries.
- Availability
of instant corporations.
- Corporate
Secrecy Laws – as the corporate law of certain countries enables
launderers to hide behind shell companies.
- Excellent
Electronic Communication
- Tight
Bank Secrecy Laws.
- A
Government that is Relatively invulnerable to Outside Pressures
- A
high degree of Economic Dependence on the Financial Services Sector.
- A
Geographical Location that Facilitates Business Travel to and from rich
neighbors.
- Increase in sophistication and employment of professional people for doing the task and their willingness to participate in money laundering activities.
In Indian and Pakistani parlance, hawala is dissected into two parts viz. white and black. The term 'white hawala' is used to refer to legitimate transactions whereas the term 'black hawala' refers to the illegitimate transactions, specifically hawala. This distinction is valuable for money laundering enforcement. Many 'white' hawala transactions are essentially remittances, though they are illegal under Indian and Pakistani law however they are not illegal in other jurisdictions. `Black' hawala transactions, however, are almost always associated with some serious offense (e.g. narcotics trafficking, fraud etc.), that is illegal in most jurisdictions. Money laundering consists of three phases: placement, layering and integration. Since hawala is a remittance system, it can be used at any phase. In placement, money derived from criminal activities is introduced into the financial system. In many money laundering schemes, the biggest 'problem' here is handling cash.
The money laundering involves a foreign ground for washing –
laundering the dirty money – proceeds of crime so that it moves in
consonance with elaborating the international developments and control
mechanisms. The situation gives birth to muti jurisdictional
investigation, which hardly yields any result. Some of the recent high profile
case are the paradigm of such investigation failure whereby it was difficult
for govt. of India to sustain the charge what to talk of ferreting out of the
evidence. There is hardly any persuasion of letter rogatory, which is
sent to other countries.
Money Laundering is a largely a secretive phenomenon. The exact number of launders that operate every year, how much money they launder in which countries and sectors, and which money laundering techniques they use is not known. 'Sadar Bazar, Chandni Chowk are of Delhi and Mumbai's old markets are few of the notorious hubs of circulation of such money in India. The inflation of indian real estate market and cash transaction by the corrupt politicians and real estate developers is known to all. They remain at large unless assailed by wrath of influential politicos of ruler class. The history of cases investigated by Enforcement Directorate shall indicate it all.
Harvard-educated
economist Franklin Jurado went to prison for cleaning $36 million for Colombian
drug Lord Jose Santacruz-Londono. Unfortunately, the finance professionals like
him are the part of the Indian financial system. People with a whole lot of
dirty money typically hire such financial experts to handle the laundering
process, who are happily willing to do it. This is an alarming situation for
the economic health of the country. Their whole idea is to make it
impossible for authorities to trace the dirty money while it's cleaned. It is
next to impossible to estimate actually amount of laundered money. This
very fact shows inaction of the enforcement agencies due to lack of public
pressure and political will. The KYC norms and other global standards are mere
eyewash and applicable to the general public. Fraudulent practices resorted by
HSBC, Standard Chartered Bank and Bank of America are now well known to the
world.
The Indian media has played a vital role to create public pressure
though the political will is missing. It impacts the day to day life of general
public. Homes have become expensive. Smuggling has ruined the native
manufacturing and even the legitimate imports. Profiteering has caused
inflation in prices of goods of daily usage. We're thus facing threats from
illicit money and its launderers, who are beyond the clutches of law.
