Kerala’s gold smuggling case
Part of: GS Prelims and Mains III – Parallel economy; Economy and issues related to it
- National Investigation Agency (NIA) probe revealed that the initial funds for obtaining gold was raised by persons with dubious antecedents and the funds were sent abroad through hawala channel.
- Money laundering is the processes by which large amounts that are illegally obtained is given the appearance of having originated from a legitimate source.
- Some crimes such as illegal arms sales, terror funding, smuggling, corruption, drug trafficking and the activities of organized crime including tax evasion produce huge money which is required to be ‘laundered’ to make it look clean.
Common avenues for money laundering in India:
- Hawala: Hawala is an alternative or parallel remittance system. In Hawala networks the money is not moved physically. For ex: A typical Hawala transaction would be like a resident in USA of Indian origin doing some business wants to send some money to his relatives in India. The person has option either to send the money through formal channel of banking system or through the Hawala system. The commission in Hawala is less than the bank charges and is without any complications for opening account or visit the bank, etc. The money reaches in to the doorstep of the person’s relative and the process is speedier and cheaper.
- Shell companies: These are fake companies that exist for no other reason than to launder money. They take in dirty money as “payment” for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.
- Structuring Deposits: Also known as smurfing, this method entails breaking up large amounts of money into smaller, less-suspicious amounts. The money is then deposited into one or more bank accounts either by multiple people (smurfs) or by a single person over an extended period of time
- Third-Party Cheques: Utilizing counter cheques or banker’s drafts drawn on different institutions and clearing them via various third-party accounts. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.
- Credit Cards: Clearing credit and charge card balances at the counters of different banks.
- Insurance Sector: The internal channels of laundering money are agent/broker premium diversion, reinsurance fraud and rented asset schemes etc. Phony insurance companies, offshore/unlicensed Internet companies, staged auto accidents, vertical and senior settlement fraud are external channels of money laundering.
- Open Securities Market: the securities markets, which are known for their liquidity, may also be targeted by criminals seeking to hide and obscure illicit funds.
- Cyber-crimes: identity theft, illegal access to e-mail, and credit card fraud are coming together with money laundering and terrorist activities. Large amounts of money is now stored in digital form.
- Illicit stock options: Example: Consider an investor ‘A’ who has incurred significant capital gains in a year. In order to offset these gains, they use illiquid stock options to book losses. The counterparty to these contracts, say investor ‘B’, books profit in these options. B already has an arrangement with A wherein he retains around 10-15 per cent of the profits made and transfers rest of the money to ‘A’ through non-banking channels.
Measures taken by the government to plug in the legal loopholes:
- The Income Tax Act, 1961
- The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA)
- The smugglers and Foreign Exchange Manipulators Act, 1976 (SAFEMA)
- The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPSA)
- The Benami Transactions (Prohibition) Act, 1988
- The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988.
- The Foreign Exchange Management Act, 2000, (FEMA)
- Prevention of Money Laundering Act (PMLA), 2002
- The Financial Intelligence Unit – India (FIUIND)
- India is also a full time member of the Financial Action Task Force (FATF) which is responsible for setting global standards on anti-money laundering and combating the financing of illegal activities.
- The KYC policies followed by banks.