Generation of new ideas and their application for productive uses is an important component in the engine for growth and development. Human talent has paved the way for high economic value creation, behind the generation of ideas, innovations, new technologies and robust financial systems. Emergence of electronic finance has on one hand benefited growth, development and inter-regional trade. On the other hand it has made the possibility to trace movements of suspect funds and in identifying the real ownership of suspicious assets behind shell companies or offshore bank facades an enormously difficult task for the enforcement bodies, the intelligence agencies and the government. Estimates indicate that globally Money Laundering amounts to more than US$ 2 trillion to US$ 2.5 trillion annually (i.e. about 6-8% of World GDP 2006 [44.444 trillion]), through formal channels. Various IIF Studies and joint research findings have been given due attention resulting in decision and formulation of regulations by GOI and international agencies – IMF, World Bank and ADB in the last 20 years. We have suggested the formulation of the “Economic Intelligence Units” and “Economic Investigating Agencies” as an independent body to combat economic offenses with the objective to flush back swindled funds into the economic system and trace the culprits involved. People in general are God fearing, honest and want to lead a simple peaceful honorable life, which they rightly deserve, that should not be taken away as a result of acts of poor governance and ill-elements in the society. In most cases or applications in India which are handled at governmental level, they follow the CD-ROM principle irrespective of the merit of the case, where, C (pay Cash Carry Certificate); D (Delays, Deficiencies & Denial of certificate); & R (Rest on Mat [never taken up & piles up dust]).
Mr. Sudhir Nath, IAS, Director of Enforcement, GOI; Prof. Dr. S Ramachandra, Vice-Chancellor, University of Madras; Mr. M R Sivaraman, IAS (Retd), Former Revenue Secretary, GOI and ED, International Monetary Fund; Dr. R. K. Raghavan, IPS (Retd), Former Director CBI and Vice President Indian Society of Victimology; Dr. S Ramdoss, Lecturer, University of Madras and Treasure, ISV; Dr. M. Srinivasan, Executive Council Member, ISV; Dr. Sreejata Banerjee, Fellow, Madras School of Economics, University of Madras; Honorable members of the Organizing Committee, other distinguished dignitaries on the dais, members of the this august audience and ladies and gentlemen, it is a matter of great privilege for me to have been invited to deliver the keynote speech on Money Laundering : New Forms of Crime Victimization : Current Trends and Modus Operandi at this prestigious Workshop of the Indian Society of Victimology which founded by no other than the eminent jurist Honourable Justice V. R. Krishna Iyer hosted at the University of Madras, Department of Criminology, Chennai, India. At the outset I must congratulate the organizers for organizing this conference, selecting an extremely timely theme and having representation from all possible wings of the decision making process in the country. It reflects the vision of the society, the department and university to further the cause of equitable socio-economic growth with peace and prosperity. Organizing workshop at this level is a very difficult task and tremendous efforts are required by a team of committed and devoted professionals to give it a final shape.
The theme of Indian Society of Victimology Workshop – New forms of Crime Vicitmization with reference to Money Laundering - has been rightly chosen by the organizers. I have tried to focus on issues like - How its done, Who does it & What law enforcing bodies need to know about to effectively counter money laundering and in-humane terrorist acts. Money Laundering is generally characterized by the intensity of fluctuations affecting the price in financial markets and generation of illegal money and a facilitator breading terrorism in the long run. Volatility in the markets due to money laundering is generally perceived as a measure of risk and uncertainty, and is also tradable market instrument in itself. We have made an attempt to address to some of these finer issues and outline as to how cases have been handled at governmental level where they follow the CD-ROM principle irrespective of the merit of the case, where, C (pay Cash Carry Certificate); D (Delays, Deficiencies and Denial of certificate); and R (Rest on Mat [never taken up and piles up dust]).
wonder as to what extent I would be able to justify this great responsibility
of delivering this keynote address. It is a very difficult task and
a great responsibility. However, it would be my endeavor to be up to
the mark as far as possible or to the expectations of the organizers
and galaxy of practitioners, judicial members, bankers and members of
financial institutions, and the intelligentsia.
Money Laundering is generally perceived to be a criminal offence due to its origination being primarily for criminal activities. Most regulations globally are hence tuned to frame and develop necessary regulations in this direction. It is “We who launder and We who are victimized” playing the role as bankers, lawyers, car dealers, real estates builders, accountants, workers and others who allow their businesses to be used to launder the proceeds of a crime or an un-official economic transaction. Every country has its criminal underworld. The biggest organizations and the ones that have been active and have had long standings can be found in the hubs of capitalism: the United States (Cosa Nostra), Europe (the Sicilian Mafia) and Asia (the Chinese Lriads and Japanese Yakusas). It has been observed that groups engaged in money laundering are by nature "criminogenic” and “regulatory resistant”. Emergence of electronic finance has been to their advantage. This new mode of fund movement has contributed in-accelerating the growth and magnitude of such crime and economic frauds. Given the staggering volume of such socio-economic criminal offences, broad international cooperation between law enforcement and regulatory agencies is essential in order to identify the source of illegal proceeds, trace the fund to specific criminal activities and confiscate criminal's financial assets. The tragic event of September 11 and the Enron debacle, have demonstrated that all the efforts to improve financial transparency in order to better track criminal money or un-lawful activities have achieved a limited result. Due to extensive use of electronic movements of money, the possibility to trace movements of suspect funds and identify the real ownership of suspicious assets behind shell companies or offshore bank facades is an enormous task which the enforcement bodies, the intelligence agencies and the government has been subjected to.
Money-laundering as a term brings to our mind those nefarious activities of the criminals who provide an envelope to “slush funds” in order to exhibit those as genuine money. In the current economic framework, money-laundering has emerged to be a process by which criminals give the color of legality and legitimacy to slush funds, as against the observed phenomena in the 1900s. Ignoring economic vandalism, most crimes have economic benefits as their backbone. In Black's Law of Lexicon the term laundering is being referred to as investment or other transfer of money flowing from racketeering, drug transactions and other sources (illegal sources) into legitimate channels so that its original source cannot be traced. Apart from the traditionally known activities for laundering of money via drugs, racketeering, kidnapping, gambling, procuring women and children, smuggling (alcohol, tobacco, medicines), armed robbery, counterfeiting and bogus invoicing, tax evasion and misappropriation of public funds, the law enforcing agencies are confronted with the creativity of human talent in flowering newer markets for such non-desired socially-ill activities. The newer markets in the last three decades to hold grounds in trade in R&D of highly strategic nature such as nuclear technology, smuggling, illegal labor and refugees, computer piracy, trafficking in works of art and antiquities, information thefts, trade of species and human organs, forgery in arms, capital market scams, toxic and nuclear products and others (Agarwal and Agarwal, 2004).
The prime factors for the illicit economic benefits, emergence of black money and money laundering has been people’s lust, greed for more money/wealth, power and influence in society resulting in the tax evasion, violation of government regulations and control, bureaucratic practices, political activities, growth of government expenditure, decline in social and moral fabric of the society and lastly, no or extremely low degree risk of being caught, convicted and punished (Agarwal, 1991). The prime factors outlined above have led to disturbance in the structural balance of economic frameworks, planning processes ineffectiveness and distorts in macro-economic growth components such as output, employment, investment, consumption, saving, spending and others.
outcome of the prime factors is well evident from the recent events
that show that terrorist groups have built financial empires. The purpose
of such empires is specifically to undermine public safety and international
financial stability. International efforts to combat money laundering
since the beginning of 1980s are built on strategies aimed to attack
criminal organization through freezing of financial movements and commodities
in trade. In the early 1980s the law enforcement was faced with the
growing threat caused by the Columbian drug cartels (like the Cali and
Medellin cartels), which had emerged to be threat not only towards public
safety but against the state itself (Thony, 2005). A series of international
conventions have come in force since the 1980s to strengthen the efforts
for combating money laundering and its ill effects namely
In India, to combat money laundering and black money issues we have had the Benami Transaction Prohibition Act 1988; the Prevention of Money Laundering Bill 1999 to cover Income Tax, Customs, Excise and Sales Tax; the Income Tax Act 1961; the Customs and Excise Acts 1962 and various others. The requirement of the Corrupt Public Servants (Forfeiture of Property) Act as suggested by the Law Commission is pending with the government since the 4th of February 1999.
Economics of Money Laundering
If we take a quick look at the case of Marc Rich, one of the world's leading commodity traders was indicted by a Federal grand jury on charges that he and his partner (Pincus Green) had evaded the US Treasury of US$ 48 million in income taxes. US Prosecutors in 1983 said it was the biggest tax-fraud indictment in American history (Berg, 1983). Marc Rich had bid for a pardon from President Clinton, which was accompanied by letters of support from dozens of politicians, financiers and officials of charitable organizations, a virtual Who's Who of Israeli society and Jewish philanthropy; prosecutors and former prosecutors renew attack on pardon of Rich and his former Partner, Pincus Green, who for 18 years evaded prosecution on charges of tax evasion, racketeering and violating sanctions against trading with Iran (MeGeehan and Cowan, 2001). Despite this act, President Bill Clinton's last-minute pardon of Marc Rich (Newlin, 2001) became very controversial however, clearly showed the failure in observing regulatory prudence in the economy along with the economic loss to the nation and the citizens. Within Europe, the EU institutions are troubled with the way Italy manages its financials. The said economy is known for the mafia to run and manage the economic affairs of the country. This is a classical case where the parallel economy is actually the normal economy itself.
In India, Kaldor’s estimates for black money generation in 1953-54 were about Rs. 600 crores (i.e. 6% of National Income then) on account of tax evasion only. Some of the other estimates further have been Rs. 700 crores (1961-62); Rs. 1,000 crores (1965-66); Rs. 1,400 crores (1968-69). Other estimates by Dr. Rangnekkar for the same periods were Rs. 1,150 cr, Rs. 2,350 cr and Rs. 2833 cr respectively. The IIF study indicated that the growth rate of black money in 1991 has been at a rate of Rs. 60,000 crores per year (Agarwal, 1991). Black money generated from legal activities accounts for the parallel economy in India, which is considered to be as strong as the normal economy. It is estimated that the yearly growth rate of Black money is a factor to the tune of 40-50% of GDP growth in the Indian economy on a year to year basis (Vittal, 2002). Black money, which is at the root of corruption, in politics business and bureaucracy, needs to be effectively minimized. The framework as outlined earlier exists, however the will to enforce the same needs to co-exist both at the enforcement and political levels.
Some of the Government officials are to be equally blamed for this menace as some of them are highly corrupt and benefit from the loop holes in the system, excessive security of service, lack of accountability and failure of judiciary to expeditiously and rightly decide the cases (ref to Justice Shamikh Mukherjee of Delhi High Court). We have a strong vigilance system, but how many complain and if a complaint is registered against an erring official, then what is his/her fate. In most cases it has been found that the complainant is harassed to death and/or has to be faced with closure of business. Delay in deciding the applications/cases is used as the method to force people to scumb to their corrupt practices.
In most cases or applications in India which are handled at governmental level, they follow the CD-ROM principle, irrespective of the merit of the case
C refers to pay Cash Carry Certificate
Banking Sector: Medium, Regulator and Cause
It is clearly visible in these two cases as to how vulnerable are the Banks and how they turn to becoming the medium and cause for money laundering. Cases before enforcement agencies have shown that some of the more common laundering methods used are: the Black Market Peso Exchange, cash smuggling (couriers or bulk cash shipments), Black dollar, gold purchases, structured deposits to or withdrawals from bank accounts, purchase of monetary instruments (cashier's checks, money order, traveler's checks, etc.), wire transfers, purchase of derivative products (as seen in September 11 attack) and forms of underground banking, particularly the Hawala system.
Recent IMF estimates on money laundering by the drug traffickers to introduce the proceeds gained through the sale or distribution of controlled substances into the legitimate financial market amounts to between 2 to 5 percent of the world's GDP, about US$ 600 billion annually (US-DEA, 2005). In our opinion this is a very conservative estimate and far lower than the actual money laundered (i.e. 2-3 times of the DEA projections – US$ 1.5 trillion) within the drug trafficking business. Money laundering allows the true source of the funds gained through the sale and distribution of drugs to be concealed and converts the funds into assets that appear to have a legitimate legal source. The need to launder conspicuously large amounts of small-denomination bills renders the traffickers vulnerable to law enforcement interdiction. Tracking and intercepting this illegal flow of drug money is an important tool used to identify and dismantle international drug trafficking organizations.
In addition to the general factors cited above, the actual products and services offered by the private bank also tend to create opportunities for money laundering.
Multiple Accounts: A striking feature of the private bank accounts examined
is their complexity. Private bank clients often have many accounts in
many locations. Some are personal checking, money market or credit card
accounts. Others are in the name of one or more shell companies and
multiple investment accounts are common, including mutual funds, stock,
bonds and time deposits. The reality right now is that private banks
allow clients to have multiple accounts in multiple locations under
multiple names and do not aggregate the information. This approach creates
vulnerabilities to money laundering by making it difficult for banks
to have a comprehensive understanding of their own client's accounts.
In addition, it complicates regulatory oversight and law enforcement,
by making it difficult for banks to have a comprehensive understanding
of their own clients accounts. It also complicates regulatory oversight
and law enforcement, by making it nearly impossible for an outside reviewer
to be sure that all private bank accounts belonging to an individual
have been identified.
The famous BCCI case has been given reference to in the Appendix.
Capital Flight and Kick Backs
Zdanowicz, Welch and Pak, Finance India, Vol IX No 3, September 1995
Source: Zdanowicz, Welch and Pak, Finance India, Vol IX No 3, September 1995
In 1993-94 India was seeking FDI and FII investment to spur growth, having opened up the economy to the new Economic Reform Framework. Capital flight at periods of economic reforms is bound to destabilize domestic financial markets, and the efficiency of monetary policy. Also capital outflows may lower domestic investment and erodes the country’s tax base which in turn increases the public sector deficit. The effect of the economic impact of capital flight results in the erosion of the country’s political and economic system. One can imagine as to how disastrous would capital flight of an average of US$ 5.5 billion per year to a single trading partner, the United States, would cost to the economy, at the inception stage of the economic reform process and as a critical negative growth factor for the future. With capital flows of just US$ 1 billion making roars in India, an capital outflow of US$ 5.5 billion/year to a trading partner having 40-45% of trade component on a select few commodities in the total trade portfolio with US was shocking. It was fortunate that the IIF-FIU study surfaced at the right time and received due attention and was placed as The Day’s news in leading newspapers (TOI, HT, Hindu and others), which helped bring attention of the policy makers and parliamentarians. Issues hence were raised in the parliament and the Money Laundering Bill was frames, which later lead to the formulation of the Foreign Exchange Management Act (FEMA) from the Foreign Exchange Regulation Act (FERA).
The macroeconomic policy variables and conditions have a significant influence on capital flight, even after controlling for country effects and institutional quality. Institutional quality particularly effective institutional constraints on executive power, which has an independent impact on capital flight. There is a strong evidence of revolving door relationship between borrowing and flight as the result of "debt-fueled capital flight" as well as a "Financing need" channel working in a opposite casual direction (Rishi, 2006). While debt tends to stimulate capital flight, the FDI and aid tends to reduce the flight. Short term debt accumulation has the most severe impact on capital flight. Based on the OLS estimates (Cerra, Rishi and Saxena, 2005), it has been found that 21 cents of each dollar of debt taken by a country, flows back out of the country as Capital Flight. Each dollar of Capital Flight flown needs a further withdrawal of new debt to the tune of 69 cents to fill the gap so created as an outfall of 21 cents per dollar capital flight. Hence, capital flight is identified as a mechanism by which Institutional quality influences volatility (Rishi, 2006). Weak institutions spur capital flight thereby indirectly raises debt accumulation. The loss of domestic savings associated with capital flight is partly offset by increases in foreign financing. The results of Cerra, Rishi and Saxena study presented at IIF has suggestive implications for recent debt relief and foreign aid initiatives. By reducing, prospective taxation to finance debt repayments, relief may reduce capital flight and thereby leverage the impact of such assistance. Foreign aid or debt relief should be complemented by sound macro-economic policies and an institutional environment conducive to allocating available resources to useful projects within the country.
Black Dollar Exchange Scam
Government Policies, Schemes and Tax Structures
Also the introduction of Fringe Benefit Tax 2004-05 (FBT), is against the nomenclature of tax systems. The people will willing abiding by the norms prescribed by the MoF and DoCA, however the job of the ministry or the department while framing policies is not to look it from short term perspective and/or as a medium for collection of funds, but also to see what may be the effects of such policies in the long run. Also it needs to see that the systems are implemented across board, with no differences between Government and Private institutions. Tax systems which have developed such flaws make organizations and businesses shift their bases to regions/countries where the norms are more harmonious and in tune with international norms. Incase an organization is unable to shift bases, then they are seen to indulge in money laundering issues to protect the interests of the stakeholders in the organization.
There has however been a negative response to the system due to requirement of authorized persons for filing the E-Returns and an additional burden of fee on account of purchase of software and filing of E-Returns, which varies from INR 5,000 to INR 15,000 for charges on account of processing, drafting and converting hard copy to e-form, depending on organization and return size. These costs are not an issue for corporations which are mid-size or large having audit fee in lakhs or thousands. However, for small sector operators, Kirana (grocery) shops and SME’s this is a heavy price and would deter them away from filing for e-returns and hence lead to re-creation of black money in the system.
SEZ and Export Incentive Schemes
It has been observed internationally that Tax Heavens like Cyprus, Mauritius and others who have offered to be No-tax zones with very basic banking and financial restrictions for financial transactions or operations of foreign business, have turned to be hubs for channeling and housing money laundering funds. It is a step in the right direction that Ministry of Finance has taken for setting up norms for Transfer pricing in SEZ and Technology parks, where tax breaks have been provided on long durations.
In the last decade it has been observed that a series of Internet Frauds have spurred up the capital market, brought forth the lacuna in the regulatory prudence and had generated loss of investor’s confidence. SEC sweep nets another 23 Internet fraudsters by March 2001. On March 1, 2001, the United States Securities and Exchange Commission (SEC) announced its latest success in a continuing crackdown on Internet securities fraud, bringing 11 enforcement actions against 23 individuals and companies. While regulators in Canada, including the Ontario Securities Commission (OSC) and the British Columbia Securities Commission (BCSC), devote some of their scarce resources to monitoring Internet chat sites and reviewing suspect websites, the SEC has been far more aggressive and successful in pursuing Internet scams than its Canadian counterparts. The SEC has a dedicated corps of more than 200 enforcement staff, known as the CyberForce, specially trained for Internet surveillance. The OSC and BCSC rely on a relative handful of enforcement personnel, many of whom count Internet monitoring as only one of several duties. The latest SEC enforcement actions are the result of its fifth Internet sweep, bringing the number of Internet-related enforcement actions to more than 200, involving more than 750 named individuals and entities. The Sarbanes Oxley Act of 2002 is expected to take care of the above cited situations and specially those like the Enron-Arthur Anderson case. We have seen similar actions being taken up by enforcement agencies in India, however SEBI still needs to play a pro-active role in curbing such menace’s in the Indian capital markets.
Currency (INR) and Exchange Controls (Capital Account Convertibility)
For the large number of low-skilled expats from India, the combined lure of making more on the exchange rate and using the INR to do their high-value shopping is irresistible (Bhatacharjee, 2006). Also the presence of a large number of Indians in several markets abroad has raised their profile and the tacit acceptance of Indian currency by local shopkeepers, more true of bargain markets has brought forth the need to have INR as reserve currency (Agarwal, Agarwal and Agarwal, 2006; Bhattacharjee, 2006). The Indian currency INR is freely accepted in the neighboring region (Nepal, Bangladesh, Sri Lanka, Burma), in the Arabic region and now in Mauritius (under special arrangement with the Reserve Bank of India). The acceptability is there both at official level in certain countries and market/trade driven in the others. With the move for various Indian organizations increasing their international presence with takeovers and formulation of MNC for trade and services. RBI needs to initiate necessary actions as an immediate responses, else as reported in ET, it has been found that some Mumbai based operators are reported to have placed orders on Dubai-based operators for supply of fake Indian currency notes (Bhattacharjee, 2006). Hence the currency crunch in the market would get financed through fake currency. Federal Reserve Board is faced with similar challenge and has no solution to this problem, which surfaced before the FRB 2 decades back.
Money Laundering : Causes and Concerns
Masclandaro outlined four postulates on the analysis of the phenomenon, which propagate precise indications on the design of regulations aimed at implementing the policy of preventing and combating the phenomenon. The postulates were
Vulnerability to Terrorism Financing Risk ,
Growing attention has been paid to the role of Non-Cooperative Countries and Territories (NCCT) in money laundering and terrorist financing activities.
: Standard Errors in parentheses.
The econometric analysis of Masciandaro’s propositions generally confirming that the probability of being an NCCT jurisdiction will depend on specific country endowments (see Table III & IV). His findings indicated that the probability a country will become an NCCT jurisdiction tends to be higher the more it experiences economic growth problems, measuring those problems in terms of per-capita GDP and the level of land exploitation. It was noted that the probability a country will become an NCCT jurisdiction tends to be higher the more it has developed the flow of foreign deposits. Looking at the joint Index of the terrorism risks and organized crime risks it is seen that every national policymaker cares about both risks, and lax financial regulation that benefit in principle either terrorism or organized crime. In fact we note that the probability a country will become an NCCT jurisdiction tends to be higher as the degree of terrorism and organized crime risks decrease. The study also noted that non-cooperation is not associated with tax competition. While there is a theoretical presumption that international tax evasion and money laundering through offshore centres should overlap (Yaniv 1994, 1999; Alworth and Masciandaro, 2004), this is not necessarily the case. It can hence be seen that poorly regulated financial markets not only open up new opportunities for financial crimes but also threaten the stability of the international financial system.
the banking framework, it is observed that the "fraudsters"
use fake certificates of deposit drawn on other branches of an international
bank, which can range from US$10 million to US$ 25 million. The “fraudsters”
also use fund transfers, which involve real dollars, opening up small
accounts into which they then pour millions of dollars. “Fraudsters”
will also use counterfeit letters of agreement, drawn on bank letter
heads, seemingly vouching for a client from another branch of that bank,
or confirming a deal has been approved etc. The problem which creates
a temptation to approve such transactions, is that these banks may be
turning away legitimate business. Thus there is concern that banks operating
overseas may be at a competitive disadvantage because they adhere to
standards for “knowing your customers” (Agarwal and Agarwal, 2004) identifying
beneficial owners of transactions refusing suspicious or unusual transactions,
etc. The banks should be advised informally that the answer is not to
lower standards in t he home country or abroad, but to intensify efforts
to ensure that all major financial centers operate within the limits
of an international consensus on counter measures.
a. IDFC, Yes Bank, GTB IPO, 2005 Scam : In the IPO scam some 47,000 fake demat accounts in the IDFC issue, over 10,000 fake accounts in the Yes Bank issue and at least a dozen are still to be investigated. The in famous Roopalben Panchal, whose link to 6,315 demat accounts seemed scandalous in the Yes Bank IPO, now turns out to be connected to an incredible 14,807 demat holders who obligingly transferred their allotment to her before the issue opened for trading. When the perversion of the Yes Bank IPO allotment was unearthed, RBI Governor Reddy had said that it was not a systemic issue but a localised fraud that would be dealt with severely. After the IDFC revelations, the Finance Minister cracked the whip but indicated that there were ‘‘systemic deficiencies’’. He also promised ‘‘severe action’’ against those responsible. The question is — where are these systemic deficiencies? Are they in the allotment process? Similarly Global Trust Bank had been pulled up by the RBI for abuse of the ‘Stock Invest’ scheme while the Navrangpura branch of Punjab National Bank helped a dubious Growmore Solvents claim a 90 per cent subscription (minimum subscription required for companies to retain IPO proceeds) by misusing the ‘Stock Invest’ scheme. As SEBI says, ‘‘Banks have also played their part by opening bank accounts and providing a pro-tempore loan to these fictitious entities with the objective of earning interest and other charges’’. Hence, the banking system at the small branch level is extremely vulnerable to collusion by officials in laundering unaccounted money and other mischief. In an interview of Indian Express Representative in May 2005, Chidambaram had said, ‘‘There is a misconception that money put in a bank is white money and is not tainted money. The banking system is, in fact, a well-known instrument of laundering money. I have massive evidence of the banking system used for laundering’’.
b. Ketan Parekh, 2001 Scam: The scam shook the investor's confidence in the overall functioning of the stock markets. By the end of March 2001, at least eight people were reported to have committed suicide and hundreds of investors were driven to the brink of bankruptcy. The scam opened up the debate over banks funding capital market operations and lending funds against collateral security. It also raised questions about the validity of dual control of co-operative banks. The first arrest in the scam was of the noted bull, Ketan Parekh (KP), on March 30, 2001, by the CBI. Soon, reports abounded as to how KP had single handedly caused one of the biggest scams in the history of Indian financial markets. He was charged with defrauding Bank of India (BoI) of about US$ 30 million among other charges. KP's arrest was followed by yet another panic run on the bourses and the Sensex fell by 147 points. By this time, the scam had become the 'talk of the nation,' with intensive media coverage and unprecedented public outcry. The companies in which Ketan Parekh held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest Communications, and PentaMedia Graphics. KP selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. He is said to have taken advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks. The shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially (Refer Exhibit I for BSE Index movements). HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks. Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges (Refer Exhibit II for the price movements of K-10 stocks). HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion . As such huge amounts of money were being pumped into the markets, it became tough for Ketan Parekh to control the movements of the scrips. Also, it was reported that the volumes got too big for him to handle. The total amount involved in the scan was Rs. 137 crores, the impact was far greater.
c. Abdul Karim Telgi , 1994 Scam : Telgi, was arrested in 1991 by Mumbai police for fraud. He reportedly learned the art of forgery from an expert in prison; his exploits resulting from this knowledge eventually made him famous. In 1994, Telgi acquired a stamp paper licence from the Government of India. He began printing fake stamp paper. He appointed 300 people as agents who sold the fakes to bulk purchasers, including banks, FIs, insurance companies, and share-broking firms. His monthly profits have been estimated as being in the neighbourhood of Rs 100 crore (US $ 20 million). A videotape emerged in September 2006 of Abdul Karim Telgi taking a narco-analysis test. Under the influence of the truth serum, Telgi supposedly blurted out the names of Nationalist Congress Party leaders Sharad Pawar and Chaggan Bhujbal.
d. Harshad Mehta 1992 Scam : Mehta and his brothers were arrested by the CBI on for allegedly ``misappropriating” (in 1992) more than 27 lakh shares of about 90 companies, including Sensex heavyweights such as ACC and Hindalco, through forged share transfer forms.'' The total value of the shares was placed at Rs 250 crore. By 1991, Mehta had become the most recognisable and revered icon of the stock market. Considered a financial genius by many, he was nicknamed the Big Bull who single-handedly decided the course the markets would ply. At the peak of his glory, Mr Mehta lived in a 15,000 sq.ft. house with its private swimming pool and golf patch. His lavish lifestyle and flashy cars were the stuff known only of movie stars. Investigations revealed that his ``unending resources'' were actually siphoned off from the banking system. According to investigators, he had devised an ingenious way of using bank receipts to feed the stock market frenzy. He was arrested and banished from the stock market with investigators holding him responsible for causing a loss of more than Rs 4,000 crore to various entities. Mr Mehta again raised a furore in 1995 when he made a public announcement that he had paid Rs 1 crore to the then Congress President and Prime Minister, Mr P.V. Narasimha Rao, as donation to the party for getting him ``off the hook.''
e. Bofors Scandal, 1980 : The Bofors Scandal was a major corruption scandal in India in the 1980s; the then Prime Minister Rajiv Gandhi and several others were accused of receiving kickbacks from Bofors AB for winning a bid to supply India's 155 mm field howitzer. The scale of the corruption was far worse than any that India had seen before, and directly led to the defeat of Gandhi's ruling Indian National Congress party in the November 1989 general elections. The case came to light during Vishwanath Pratap Singh's tenure as defence minister, and was fueled by very sharp investigative journalism by Chitra Subramaniam of the newspapers The Hindu and Indian Express. The name of the middleman associated with the scandal was Ottavio Quattrocchi, an Italian businessman who represented the petrochemicals firm Snamprogetti. Quattrocchi was closeness to the family of Prime Minister Rajiv Gandhi and emerged as a powerful broker in the '80s between big business and the Indian government. In 1997, the Swiss banks released some 500 documents after years of legal wrangling and the CBI filed a case against Quattrocchi, Win Chadha, also naming Rajiv Gandhi, the defence secretary and a number of others. Several attempts to extradite Quattrocchi failed. In February 5, 2004 the Delhi High Court quashed the charges of bribery against Rajiv Gandhi and others, but the case is still being tried on charges of cheating, causing wrongful loss to the Government, etc. On May 31, 2005, the High court of Delhi dismissed the Bofors case allegations against the British business brothers, Shrichand, Gopichand and Prakash Hinduja. On January 11, 2006 the high Court in London ordered the defreezing of the two British bank accounts of Ottavio Quattrocchi on the grounds of insufficient evidence to link these accounts to the Bofors payoff. The two accounts, containing € 3 million and US$1 million, had been frozen in 2003 by a high court order by request of the Indian government (when the (now) opposition party BJP was in power). On January 16, the Indian Supreme Court directed the Indian government to ensure that Ottavio Quattrocchi did not withdraw money from the two bank accounts in London. The CBI (Central Bureau Of Investigation, on January 23, 2006 admitted that roughly Rs 21 crore, about US$ 4.6 million, in the two accounts have already been withdrawn. The British Government released the funds based on a request by the Indian Government. However, on January 16, 2006, CBI claimed in an affidavit filed before the Supreme court that they were still pursuing extradition orders for Quattrocchi.
f. Haridas Mundhra Scam, 1957 : The Mundhra scandal was the first few successful trial of a financial scandal in independent India. Life Insurance Corporation of India had bypassed its investment committee and purchased Rs. 1.25 crores (Rs 12.4 million) worth of shares in six companies belonging to Calcutta industrialist Haridas Mundhra in order to bail him out under pressure from the government. The six Mundhra companies -- Richardson Cruddas, Jessop's, Smith Stanistreet, Osler Lamps, Agnelo Brothers and British India Corporation, whose shares were purchased by LIC, were in a bad shape and Mundhra had been bleeding them even as he manipulated their prices. When he could not hold up prices anymore, LIC was forced to buy out the shares and the deal was justified as a purchase done to "to remove a drag on the market" and keep it from collapsing. An explosive disclosure of the surreptitious deal in Parliament by Prime Minister Nehru's son-in-law Feroze Gandhi, in 1958, led to a nationwide furore and forced the government to appoint a one-man commission headed by Justice Chagla. He conducted a swift and transparent 24-day public inquiry, which led to the resignation of the then Finance Minister T T Krishnamachari and punishment of the guilty in less than two years. It is ironical that Indian scamsters over the years have simply copied Mundhra's modus operandi, fully confident that the same old political interference will protect them again. The difference between 1957 and 2005 were people who deposed against Mundhra: H T Parekh, as member of the LIC Committee had objected to the deal in writing; K R P Shroff, renowned president of the Bombay Stock Exchange said that had LIC consulted the investment committee, he would "certainly not advise them to touch it (the Mundhra shares)". Bhagwandas Govardhandas, a leading broker and also member of the LIC investment committee went a step further and told the Chagla Commission that not only were the Mundhra shares worthless, but the BSE had, as far back as August 1956 put up a notice to warn investors that "some of the shares, being hawked by Mundhra, were forged". He said that left to himself he would not touch them "with a pair of tongs”.
It is clearly visible from the above cases that there is a nexus of money launderers, politicians and off-shore and/or domestic financial institution/banks which has weekend the role of enforcement agencies to function in the best interest of the society at large. One may wonder the above mentioned cases are simple capital market scams and as to what are they to do with money laundering. We have known that Casino and financing of movies are flooded with money laundered money to convert these funds from black to white. Similarly, the recent IPO issue (IDFC, Yes Bank, GTB) , NPA issues (like Mundra) and other capital market scams mentioned above have been utilized for this convergence factor. Not only this, but the above have been due to malified intension and not because of either change in regulations or as a mere co-incidence (of being at the wrong time at the wrong place).
In a short story released by Bloomberg on the 26th July 2006, it was reported that Singapore is not fussy about the source of wealth in its financial sector and has been deterring to sign agreements with other countries to share financial/banking information so as to counter money laundering flows amounting out of corruption or criminal activities. Among the Indonesian crooks and suspects believed to be on the run in Singapore are Bambang Sutrisno and Adrian Kiki Ariawan, who were found guilty of embezzling the equivalent of US$ 162 million from Bank Surya; Sudjiono Timan, who was convicted of improperly diverting US$ 120 million from a state-owned investment company; Lidia Mochtar, who is wanted over the embezzlement of US$ 20 million from Bank Tamara; Agus Anwar, a suspect over US$ 214 million that's unaccounted for from Bank Pelita; and Pauline Maria Lumowa, who is wanted over US$ 184 million that's missing from Bank BNI. Others whose whereabouts are unknown are able to safely visit Singapore. Hence Indonesia has been wanting to sign a treaty to tap some of these frauded funds and frauders. However, Singapore according to the Bloomberg report has argued that because its laws are based on English common law and Indonesian law is based on Dutch codes, the two systems are incompatible, making an extradition treaty difficult. But this didn't stop India from signing such a treaty with the Philippines in 2004, or Australia from signing one with Indonesia. Fugitive Indonesian banker Hendra Rahardja, who embezzled almost US$ 300 million, was on the verge of being extradited from Australia in early 2003 when he died of cancer in Sydney. His funds in Australia were frozen and returned to Indonesia. A corollary of Singapore's reluctance to sign an extradition treaty with Indonesia is its apparent lack of fussiness about the sources of the funds attracted to its banking sector. (Beckman, 2006). Similar are the experiences with the movements of Funds in Swiss Banks and other NCCT countries. There has been repeated request by BIS and other nations to the Swiss banks and NCCT countries to observe secrecy and customer privacy norms as prescribed and outlined by BIS to counter money laundering and terrorist activities in the globe.
While the above laws and regulatory framework is necessary, the need to have Economic Cells to deal with financial crimes is equally vital. In the cases outlined above, the frauds were dealt by the criminal investigating agency instead of an economic investigating agency/cell. It is vital for the judiciary to charge the financial or criminals with necessary criminal charges; however it is must that the money lost or swindled by the culprits is first obtained and flushed back into the system before the criminals are tried for their dues or interrogated for other’s involved in the scams. Be it Ketan Parekh, Harshad Mehta, Mundra or Telgi, the amounts swindled were not obtained and the focus was to estimate the magnitude and trace those who were at the support of such frauds. In-such cases the society and markets end up bearing the costs with loss of market confidence and deaths of individuals who’s money is lost.
Uprooting Money Laundering
It is also vital that governments in power and regulators frame economic policies which are not detrimental to market movements and trades. In India, as mentioned earlier, we have found that Economic Policy framework for taxation and trade restriction have lead to the emergence and growth of dirty money and money laundering activities. These can be taken care off, if economic policy framework is well debated and tested for their ill effects in democratic environments, before implementation. To have effective supervision, the following components need to be well addressed in any given regulatory framework for effective reduction of leakages (a) Purpose of Regulation (b) Accountability (c) Market Abuse (d) Due Process (e) Manner of Regulation (f) Cost of regulation (Lal, 2003). International banking continues to grow, developing worldwide connections among banks, as well as the increasing sophistication of banking methods. The constant challenge is to ensure that every bank can account for its customers. Every government has laws which ensure the prosecution of financial crimes, and that every society sets moral and ethical standards for the conduct of commerce. Many important financial centers have now adopted legislation to curb drug related money laundering, and the number of governments which have ratified the 1988 UN Convention continued to increase. But the race between criminals seeking new ventures, and oversight bodies seeking more widespread compliance, still goes to the crooks.
Money Laundering is the biggest Fear for Finance Industry. The entire industry in the world or any separate country must understand that financial crime needs to be understood, analyzed and fought proactively. Banking Industry needs to be one step ahead of money launderers in order to control the menace of money laundering and financial crimes. Concern regarding financial crime is growing to unprecedented levels amongst UK financial institutions (Logic CMG Report, 2003). One of the best control techniques for the banks to control money laundering is to know your customer (FSA Report, 2003). The consultation paper, published in August 2003, describes the FSA's money laundering directions on two important anti-money laundering controls: One, Issues relating to obtaining and using customer information for anti-money laundering purposes, and secondly on Anti-money laundering monitoring, assessing customers use firms' products and services and how possible money laundering activities can be identified from this. Eleven world money centre banks agreed in October 2000, to a set of anti-money laundering guidelines - for private banking activities. These guidelines state at the outset that “bank policy will be to prevent the use of its worldwide operations for criminal purposes.”
With organized crime in control of banks and able to launder huge sums of money not only for themselves but also for other criminal organizations it is a call for concern. Already in Russia it is said that criminal groups control over 400 banks and 47 exchanges. This is worrying bank chairmen in Russia as between July 1994 to 1995, there were thirty assassination attempts against top bank officials, sixteen of who were killed. These killings along with earlier ones were important indicators of the efforts by criminal organizations to infiltrate the Russian banking system. Infiltration of the banking system offers significant advantages for criminal organizations, not least the opportunity it gives to facilitate money laundering for both Russian and foreign criminal organizations. Russian officials have worked with FATF and us government agencies to put into place more effective regulations and proceedings to combat money laundering, in accordance with international standards.
In February 1988, the OECD's Financial Action Task Force- for money laundering in its Annual Report highlighted the problem in Mexico and stated “One of the most favored technique continues to be out bound currency smuggling, along with electronic transfers, Mexican bank drafts and the parallel peso exchange market. Corruption remains the chief impediments to Mexican's anti-laundering efforts.” Under the auspices of UNO, there is an international campaign to crack down on an essential component of the problem of money laundering. Now countries have enacted laws to prevent money laundering and allow closer scrutiny of suspect bank accounts of criminals. SWIFT is the principal international service for wire transfer message trafficking that can initiate funds transfers. In Russia and some East European states, banks can be readily purchased for very little money - though few of them have electronic banking access to SWIFT. SWIFT is a co-operative society located in Belgium having 2600 institutions in 65 countries providing services to security bankers & dealers; clearing institutions; and security exchanges.
In most cases or applications in India which are handled at governmental level, they follow the CD-ROM principle irrespective of the merit of the case, where, C (pay Cash Carry Certificate); D (Delays, Deficiencies & Denial of certificate); & R (Rest on Mat [never taken up & piles up dust]).Unfortunately, least respect for law and maximum violation of law is the order of the day by some of those who are in authority – as they are charged with the responsibility of enforcing laws (guardians of laws) or mafia groups, gangs and/or nexus of the two. The former enjoys the constitutional security and later is outside the frame work of law. A common man does not question either of them. Education and economic prosperity can help reduce these disparities and social evils.
In the last 40 years, there has been a dire need for emergence of “Economic Intelligence Units” and “Economic Investigating Agencies”. Though these have been formulated as divisions within the existing Intelligence and Investigating agencies, but are neither independent nor have the expertise to handle economic frauds. In India these are handled by the IPS officers using IPC or CrPC, who have been primarily trained to deal with criminal scenarios as against economic. We do not wish to counter or undermine the competence of the officers currently engaged in re-solving some the economic offences, however the need to first obtain the money lost due to economic offenses as against tracing the group/gang involved is vital, and not addressed so far. It is also vital that a specific degree of freedom is granted to these agencies making them to function independently (autonomously) without the interference and control of government like the Election Commission of India. We do have a series of regulatory bodies and enforcement agencies in place in India, however they are also subjected to low degree of independence and seepage of corruption which has resulted in their low level of performance leading to a strong mafia for money laundering and terrorist activities. Most of these authorities want more teeth. Grant them bigger teethes but ensure that these teeth are not used to extort money from the honest. A consequence of the current state is already felt in large number of innocent families losing their support life systems due to terrorist activities and poor governance systems.
We are happy to see that Government of India has issued anti-money laundering guidelines before introduction of the Prevention of Money Laundering Bill in Parliament. Indian Bill embraces money laundering from drug-trafficking, terrorism, profits from prostitution, extortion, smuggled items 1ike gold, diamond etc. India's security is threatened by the spread of international crime control, free trade, globalization and advances in telecommunications leading to the increased reach of crime syndicates. The Bill in Section 3 deals with the offense of money laundering which states that whenever a person acquires, owns, possesses or transfers any proceeds of crime or knowingly enters into any transactions or deals or aids the concealment of the “proceeds of crime”. This means that any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of such property. The Bill has the schedule offence which lists 16 sections of Indian Penal Code, 6 Sections of Arms Act, 9 sections of Narcotic Drugs Act and 4 sections of the Prevention of Corruption Act. Thus the Bill covers all activities which are capable of producing illegal money. The RBI panel has recommended rules against money laundering through improvement in procedures and policies for preparing appropriate (banks) customer profiles and coordination and cooperation with regulatory and other authorities. The panel said banks operating in India should ascertain the source of funds in deposit schemes offered to expatriate Indians as part of their drive to prevent money laundering. It also suggested each bank appointed an anti-money laundering compliance officer and create profiles of customers. It called for creation of a data bank of suspicious transactions, which could then be circulated to banks to help them defect patterns of suspicious behaviors. However, the RBI did not say when it intends to implement the recommendations. But technological initiatives in the Indian banking space have gradually gathered momentum ever since RBI announced the policy of privatization of banking in 1993. Infrasoft Technologies has launched a anti-money laundering software similar to SWIFT in India on the 17th of September, 2003. This is a huge development being India's first globally of adoptable Anti Money Laundering (AML) Software named OMNI Enterprise. Considering the size and dimension of the problem, and the alarm, Infrasoft Technologies, a specialist banking product player, is counting on its early mover advantage to make the lead way in the anti- money laundering products sphere that is estimated to be worth close to US$ 10 billion (Agarwal and Agarwal, 2004).
The United States has desired India to play a more aggressive role in its global campaign against terrorism and terrorist financing by joining groups striving to curb money laundering. The Indian Parliament is yet to pass The Prevention of Money Laundering Bill, 1999, and the country is yet to join the Paris based Financial Action Task Force consisting of 29 nations set up in 1989 to prevent international money laundering. Since the September 11 attack, cutting off money to terrorists has topped the agenda of FATF, which includes the United States, Britain, Canada, France, Brazil and Switzerland. The panel has used FATF rules as a guideline. Alarmed with reports of money from global terrorist organizations flowing into their account, banks across the globe are implementing special anti-money laundering software to detect unusual flow of money.
With the changing structure of world investment, trade, capital flow and the need for deeper integration, the need to strengthen Financial regulatory framework and signaling system is the need. Globalization has altered the economic frameworks of both developed and developing nations in ways that are difficult to comprehend. The persistent rise in the dispersion of current account balances of the world as a whole, wherein the sum of surpluses match the sum of deficits has grown substantially since the World War II. Also the emergence of unregulated global markets appears to have moved towards a more stable and growth oriented economic globe with higher risk to the integrity of the financial systems. The credit derivative market was almost nonexistent in 2001, grew slowly until 2004 and then went into the stratosphere, reaching US$ 26 trillion this June 2006, which has caused a worry for Securities Commission worldwide. Many other financial instruments are now being invented, and markets for credit derivative futures, credit default swaps and binary options are in the offering (Kalko, 2006). Economies have been hit one after the other with the fashion and need for market driven capitalist and liberalized economic system in the past. The 90’s has also seen the emergence of E-finance which apart from the efficiency, product enhancement and lower cost of transaction has facilitated the crisis frequencies, globalization and movement of capital flows internationally without much control. The significant reduction in global trade barriers over the past half century has contributed to a marked rise in the ratio of world trade to GDP. External finance has contributed to the movements for growth in trade and development across regional barriers. This has raised concerns and risk of money laundered funds moving into the regularized markets in a smooth and non-surfing fashion. The solution is not by stopping these inter-regional market growth activities, but by developing sensitivity sensor systems within the financial framework as an integrated approach to keep markets from busting and causing socio-economic panics.
Faced with these uncertainties, it is especially important that policymakers undertake the required policy adjustments for a sustained global expansion. As well, supervisory and regulatory authorities need to continue to strengthen financial market infrastructure to underpin the resilience of the financial system. With global imbalances, the entire global financial structure is becoming uncontrollable in crucial ways that its nominal leaders never expected, and instability is its hallmark. Financial deregulation has fueled the concerns for money laundering to flourish and in resolving the problems that have emerged for those who deplore controls on making money. The BIS Annual Report has discussed some of these problems and the triumph of predatory economic behaviour and trends which are difficult to rationalize (BIS, 2006). We hope there is better understanding between nations to combat the emerging crisis that may lead to eradication of civil society and become cause for pain and trauma for honest man to survive in the society. We do not wish to see more farmers and people dying due to drugs and criminal acts in the society due to money laundered money. It is time that the NCCT start working in alliance with other economies and agencies to minimize economic and criminal offence in a growing inter-connected prosperous global village.
The world's worst banking scandal, inflicting huge financial losses on thousands of people worldwide, surfaced in the media in 1991. This was the Bank of Credit and Commerce International (BCCI). As could be expected, it had heavy ties with the CIA, terrorist organizations, drug traffickers, and any other crooked financial transactions shunned by most other banks. It financed terrorist activities, financial drug trafficking deals, defrauded depositors. Years before it was shut down, Robert Gates, FBIO Chief, referred to BCCI as the Bank of Crooks and Criminals.
BCCI started operations in Pakistan in 1972, with much of its funding provided by Bank of America and the CIA. Bank of America claims that it sold its BCCI interest in the early 1980s, but records show that Bank of America continued to control much of BCCI's operations until shortly before BCCI was shut down. In the early 1970s, CIA operative Gunther Russbacher transferred sizable amounts of CIA funds into the bank for the start-up operations.
The CIA knew about BCCI's activities, and found its mindset to be very manipulating and planned its own operations through BCCI. BCCI was customers made for the covert and corrupt activities of the CIA, the MOSSAD, drug dealers and terrorists. CIA operatives used the bank to launder money from CIA enterprises, including drug trafficking proceeds, and from its various financial activities within the United States, including its use of savings and loans, to fund unlawful arms shipments, finance terrorist operations, undermine foreign governments, and other covert activities. Investigating reports showed that BCCI was able t o simultaneously manipulate the spy agencies of numerous countries, including the US, Israel, Pakistan, China, Saudi Arabia, among others. BCCI was supplying funds for terrorist Organizations such as Abu Nidal. BCCI rigged international commodity markets that permitted certain insiders to make hundreds of millions of dollars in profits, offset by the same amount lost by depositors. BCCI was laundering money (drug money) for drug cartels throughout the world.
Prof. Aman Agarwal