Dealing with dirty money

The alarming growth in the volume of money-laundering and its links with other crimes, including the illicit trade in narcotics, have made it a major global problem.

A SEARCH query on 'money laundering' or 'smurfing' in a popular search engine on the Internet yields links to more than a dozen companies that offer money-laundering services with the guarantee of complete secrecy. No wonder, then, money-laundering has begun to compete with major global concerns as a problem that requires concerted international effort to tackle.

The annual global turnover of dirty money of this kind is estimated to be around $500 million, most of it generated by the illicit trade in narcotics. This has alarmed the international community, notably the industrialised countries, which have begun to lobby actively for a concerted international offensive against the problem. The 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances marked a decisive beginning in this direction, and this was followed by the establishment of the Financial Action Task Force (FATF), which currently has 26 members, mostly from Europe, North America and Asia. In 1990, the FATF came up with 40 recommendations to fight the laundering of drug-related money. The G-10's Basle Committee on Banking Supervision, which was formed in the same year. The Council of Europe's 1990 Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime are some of the other initiatives in this direction.

The latest in the series of initiatives is the U.N. Conference on Money Laundering Awareness-Raising for South and South-West Asia held in New Delhi in the first week of March. The conference, attended by delegates from Bangladesh, India, Iran, the Maldives, Myanmar, Nepal, Pakistan, Sri Lanka and Thailand, came up with a set of recommendations to be incorporated in the legislation on money-laundering that would be enacted by the governments of the region.

Money-laundering is essentially a transnational crime. Dirty money in the form of proceeds from say, the sale of drugs, is taken out to be laundered, usually in three stages - placement, layering and integration. Placement involves introducing the proceeds of a crime say, the sale of drugs, into the legal economy through various methods. This could be done in the form of smurfing, whereby a huge amount of cash are broken up into smaller sums and deposited in various bank accounts, to be consolidated later. Larger deposits can be explained away as being gains from gambling in casinos, proceeds from futures trading and speculation and profits of shell companies. Layering involves creating a complex trail of transactions, which are difficult to trace. The transactions continue until the money finally becomes integrated into the economy.

With the governments of industrialised countries putting in place firm legislation to deal with the laundering of drug-related money in their countries, many launderers now appear to take the transnational route. The money is often sent to off-shore havens (there are said to be 140 of them in countries such as Mauritius, Cayman Islands, Virgin Islands and Thailand, which have strict banking secrecy laws) to be laundered and brought back into the country of its origin. Another route, which is becoming increasingly popular with money-launderers, is investment in portfolio funds, insurance and finance companies in countries that are liberalising their financial sector. The clean money then flows back into the country of its origin. Thus concerted action by all countries becomes necessary to curb the crime.

One effective approach to the problem would be to ostracise the egregious off-shore laundering centres. Curiously, the international lobby is unwilling to consider the option of imposing an embargo that would make it binding on its member-countries to prohibit their banking systems from dealing with the offshore laundering havens. Their reluctance is defended on the ground that it would hurt legitimate business. That even countries that have stringent laws against money-laundering are not prepared to avoid dealings with established laundering centres casts a shadow on their avowed stand on tackling the problem. Even developing countries tend to turn a blind eye to foreign investments that flow from companies registered in these havens.

The rich nations are, no doubt, concerned with the destabilising impact of laundered money, which flows back into their economies and where it competes with legitimate business to the latter's disadvantage or is used to finance scams. But they are even more concerned with the drug menace, which generates the dirty money. Even the U.N. International Drug Control Programme (UNIDCP) has admitted that the seizure of hoards of drugs has had only a limited impact on the drug menace and that it can be tackled effectively only by attacking the primary objective of narcotics traders, namely, making huge profits. By attacking money-laundering, drug traffickers could be deprived of the effective use of the proceeds of their crime. Hence the emphasis on linking money-laundering to illicit drug trafficking.

Developing countries, especially the newly liberalising ones, should also be concerned with the destabilising impact of money-laundering on their economies. They have to guard against dirty money flowing into their financial and other sectors not for long-term investments but for short-term laundering purposes. The very process of laundering distorts macro-economic policy indicators. It renders the currency and the stock and commodity markets volatile. Shell companies set up to launder money provide false data, which render policy calculations awry.

At the same time, dirty money, whether generated within the country or smuggled in, is often used to finance insurgency and fund political parties to corrupt and distort the political process. Therefore, there can be no disagreement on the need for developing countries to check money-laundering.

However, the developed countries' perspective about linking money-laundering to drug trafficking has little relevance in countries such as India where dirty money stems largely from other crimes. Even the UNIDCP has admitted that India has been fairly successful in containing the illicit drug trade and that drug consumption has not yet assumed alarming proportions in the country.

In the New Delhi conference, Patrick Moulette, Executive Secretary of the FATF, included financial fraud and tax evasion among serious crimes that generated dirty money. Revenue Secretary N.K. Singh admitted that in India, money-laundering was a more serious problem compared to the narcotics trade.

In India, the black economy is estimated to account for more than half of the Gross National Product (GDP), and the Government periodically offers legal but ethically reprehensible laundering schemes such as the Voluntary Disclosure of Income Scheme (VDIS) 1997.

IF slush money in India does not stem from drug trafficking, then where does it come from? Undoubtedly from tax evasion. That is why any Indian legislation to counter money-laundering would do well to include all crimes that generate dirty money.

The United Front Government set up an expert committee to draw up the draft legislation on money-laundering. In 1997, this committee produced a recommendation by consensus, according to which the possession of proceeds of crime would be punishable under the proposed Act. Crime, in this context, has been defined as certain offences under other Acts such as the Prevention of Corruption Act, the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, the Foreign Exchange Regulation Act and the Customs Act. Notably, however, it left out the Income Tax Act, on the plea that a distinction should be made between dirty money generated by illegal activities and black money generated from tax evasion. Income from tax evasion, according to some members of the expert committee, could have been generated through legitimate business activity. However, a provision was added to the draft legislation which made the possession of unaccounted money in excess of Rs. 1 crore punishable under the proposed law.

The Bill based on this draft, which was to have been introduced in Parliament was withheld following the dissolution of the Lok Sabha in November 1997. According to sources in the Government, the final draft bill was a considerably watered down version: it left out a huge section of tax evaders from the scope of the legislation. The specious distinction between dirty money generated by tax evasion and that generated by "crime", seems to suggest that tax evasion is not a crime. To those who argue that there is an Income Tax Act to take care of tax evasion, it must be pointed out that this Act has signally failed to serve its purpose all these years. More crucially, as money-laundering in India is linked largely to the income gained through tax evasion, any legislation on money-laundering that leaves out from its ambit this primary source of dirty money, will serve little purpose.

The importance of international cooperation in tackling the crime at the investigation and prosecution stage can hardly be exaggerated. In fact, this was one of the key issues addressed at the New Delhi conference. It has been the endeavour of the U.N. and the FATF to secure worldwide acceptance of the need to combat money-laundering.

The New Delhi conference, which was a step towards this end, recommended: "In order to give maximum effect to anti-money laundering measures, states should endeavour to extend the range of predicate offences (being those which are to be regarded in law as giving rise to the proceeds of crime for the purposes of money-launderinglegislation) beyond those connected with drug trafficking, to include in their legislation as wide a range as possible." In this connection, attention has been drawn to the FATF recommendation, which speaks of "all offences that generate significant amount of proceeds".

However, whether mere inclusion of all offences that generate "significant amount of proceeds" within the ambit of money-laundering is enough to obtain necessary international cooperation at the investigation/prosecution stage is a question that needs to be given serious thought to. Since money-laundering is a transnational crime, international exchange of information is imperative for the successful implementation of the law to curb it. Any exchange of information at the international level requires the establishment of dual criminality. For example, if India enacts a piece of legislation that includes tax evasion within its ambit and requires information from some other country on a money-laundering offence relating to tax evasion, will that country which has a money-laundering law linked only to the narcotics trade be obliged to provide the information?

The Indian delegation to the conference was of the view that the inclusion of offences that generate "significant amount of proceeds" within the scope of the money-laundering law should automatically entitle India to receive information from other countries on all money-laundering offences that involve a significant amount of money. This, according to them, is irrespective of whether the offence for which the accused is investigated/prosecuted in India, is included in the corresponding list of offences in the country from which such information is sought.

Notwithstanding such interpretation, based largely on perception, it would be prudent to make this explicit in the proposed U.N. Convention on money-laundering. Otherwise, the Indian law, even if it has wide scope, will turn out to be ineffective in dealing with laundering done off-shore by its citizens and corporate bodies. The international lobby, keen to have money-laundering declared illegal in all countries, should have no objection to conceding this requirement.