By increasing the number of steps involved in laundering illegal funds, criminals try to obscure the origin of funds used to acquire assets. This renders it extremely difficult to make inferences about the presumed origin of those funds, at least with enough credibility to satisfy legal standards of proof. If a particular laundering transaction is questioned, which is often the case, the use of multiple transactions preceding and following the one under scrutiny makes it difficult to confirm that the asset was obtained with funds that were other than legal in origin…
A common device used to deposit monies into financial institutions involves the employment of ‘smurfs’, money couriers of innocuous appearance who make a large number of transactions—always less than the currency reporting requirements prescribed by the Central Monetary Authority (CMA), or the Federal Reserve Board (FRB) of the country. In the US, any transaction involving $10,000 or above is required to be reported. The smurf will either purchase money orders or bank drafts in smaller amounts. These instruments are then turned over to another individual who is responsible for coordinating their physical movement to another banking institution, usually, in another country. Smurfs are also employed to convert cash in small denominations to larger denominations. This is sometimes referred to as ‘refining’ dirty money. In countries where foreign exchange restrictions prevent currency transfers to other countries, the traffickers or criminal syndicates deposit money with underground bankers, who arrange to transfer the same to any part of the world and in favour of any nominee. The underground system of banking is called the ‘hawala’ or ‘hundi’ system and ethnic Chinese families have been operating this system through gold shops, money changers and trading companies located in different countries. This system has also taken deep roots in the Indian subcontinent. There is hardly any record keeping under this system, leaving no audit trail to follow.
Many launderers also use domestic business organisations, where cash inflow is high—theatres, retail stores, casinos, bars, etc.—and where ‘dirty’ money gets intermingled with legitimate monies on a regular basis. The trafficker is prepared to pay tax on excess revenues, so that he is now free to utilize his profits for generating assets since he has a source of revenue, which appears to be legitimate. The sale of such business, which ostensibly exhibits significant cash flows and profits, would result in realizing a better price. The other modes which are usually adopted to transfer funds outside the control of ‘regulators’ are ‘over-invoicing’ of imports, ‘under-invoicing’ of exports, ‘non-repatriation of export proceeds,’ etc. Real estate ‘flips’, or quick turnover of property at accelerating price levels, have been commonly employed in mortgage frauds. The ‘flip’ commences with understated property values and resembles the double-invoicing method to the extent that scales of prices, one real and the other artificial, are employed for a given asset. A property is purchased at a substantially low price on record and the balance is paid to the cooperating vendor under the table. After holding the property for some time, and, if necessary, developing the same after incurring some expenditure, he is willing to pay the required taxes on his ‘capital gains’, since in ‘drug trafficking’ and ‘organised crime’ there is always so much money to be washed.
Once the money reaches the selected tax haven, the second part of the laundering process starts. The money is repatriated in such a way that it appears to be from legitimate sources. One common practice is the ‘loan-back’ technique. The launderer, with the help of consultants or an attorney in the tax haven, sets up a shell corporation often further concealing the true ownership by using the local lawyer as the nominee owner. He will then choose a business venture of some type in his own country, and purchase the business with a nominal deposit; the balance of the purchase price will be in the form of loan from his secretly held offshore corporation. He is in effect borrowing his own money. Now that he has set up his business locally, the launderer continues the process by making the scheduled payments on the ‘loan’, as though it were legitimate including the interest. In this manner, the loan-back technique not only allows him to repatriate the formerly ‘dirty’ money, but also allows him to pay himself interest, as well as claim these payments as legitimate business expenses. Another variation of this type of scheme is known as ‘direct investment’, whereby, the launderer will simply invest his offshore monies in a legitimate domestic business venture with his shell corporation as a ‘foreign collaboration’. The real ownership of the foreign ‘investor’ is clouded by secrecy laws or the use of nominee owners.
Cross trading, in recent times, is being used as one of the most sophisticated money laundering mechanisms. In the securities market, the value of a share or option to purchase a commodity is governed by the price set under free market conditions by a buyer and a seller, both of whom are ostensibly unrelated. If, however, the buyer and seller of the security are working together, the market forces which are supposed to apply can be circumvented; in effect, the two related parties can work together to set an artificial price for the security.
Classic wash trading usually occurs when the persons seeking to manipulate the market price secretly, hold a substantial block of the share of the company being traded. In money laundering of this nature, such control is unnecessary—any security can be used. All that is required is that a secretly-held corporation be based offshore to act as the counterpart in the trading activity. The launderer’s goal is to use this method to repatriate monies held by that offshore entity under the guise of legitimate trading profits earned on the open market…
THE CASE STUDY OF SOUTH INDIAN BANK
Human ingenuity, creative imagination and expertise have produced infinite varieties of laundering schemes.They are as varied as the modus operandi adopted in smuggling contraband.
Banks and financial institutions, that have access to international money transfers, are a vital link and facilitate international trade in goods and services. They are used by the governments, MNCs, tourists and ordinary citizens. Banks and financial institutions, being generally open to public transactions, are also accessible to organised crime, drug traffickers, terrorists, and white collar criminals.
Normally, the banking sector does not attract attention of the law enforcement agencies for unlawful activities, unless there is specific intelligence about the persons utilizing the banking system either for criminal activity, fraud, for transfer of funds generated in crime, or the involvement of the banking personnel in such activities.
In 1995, one of the biggest money laundering operations using the banking system was detected by the Directorate of Revenue Intelligence (DRI). Subsequently, follow-up investigations conducted by the Foreign Exchange Enforcement Directorate (FEED) revealed extensive involvement of numerous banks and individuals abusing the facilities available through the banking system.
Intelligence received by the DRI indicated that the South Indian Bank Ltd., Nariman Point Branch, Bombay was involved in a massive money laundering operation. Enquiries conducted revealed that a number of fictitious accounts were opened in the bank for depositing large amounts of currency which, in turn, were being remitted to Hong Kong, against fraudulent documents, ostensibly, covering legitimate imports.
One of the accounts was in the name of M/s Chinubhai Patel & Co. said to be existing at 27, Vaishali Shopping Center, JVPD, Bombay-49, with the South Indian Bank’s., Nariman Point branch. Enquiries conducted revealed the account was opened in February 1994, and the party was introduced by the bank manager Kasturi Rangan. The manager did not follow instructions of the Reserve Bank of India (RBI), and the account was opened without obtaining the photograph of the account holder. Verification of the address revealed that the firm did not exist at that address.
This account was utilized for depositing cash of Rs 387,379,000, and from his account remittance equal to US $12,048,650 was remitted to Hong Kong in favour of M/s R.P. Imports and Exports, Hong Kong. The remittances were made on the basis of fraudulent documents. Further investigations conducted by the DRI, in India and abroad, revealed that four more firms had been operating their accounts in a similar manner in the South Indian Bank, and these firms were identified as M/s Rakesh International, M/s R.M. International, M/s P.M. International and M/s Deepee International. These firms were also found to be fictitious and not existing at the given address. They were operating the account with the said bank from June 1992 onwards. Through this account, an amount equivalent to US $80 million, approximately Rs 250 crore, was transferred from India to Hong Kong. The identity of the Hong Kong firm is under investigation.
Interrogation of the bank manager revealed that he joined the bank in June 1991, and continued till June 1994. On his own initiative, he introduced various parties for opening and operating the accounts of M/s S.R. Diamonds, M/s Nirmal International, M/s Kumar Exports, M/s D.N. Exports in July 1991, M/s R.M. International and M/s P.M. International in October/December 1991. Later, in July 1992, the account of M/s Rakesh International and, in November 1992, the account of M/s Deepee International were introduced. In February 1994, the account of M/s Chinubhai Patel and Co. was also introduced by him. He admitted that he did not know the said persons that he was aware they were not living at the addresses given by them in the ‘Account Opening Form’. He was also aware that the accounts were being utilized for depositing large amounts of cash with the sole purpose of transferring the amounts to Hong Kong, Singapore and Dubai. He further confessed that he transferred the funds to Hong Kong, Singapore and Dubai without any instructions from the account holders, and large amounts of cash was being deposited by the accused Rajesh Mehta and Prakash, whose particulars he did not disclose. The most interesting part was that he was communicating with Rajesh Mehta and receiving instructions on a telephone pager.
Investigations conducted by the DRI revealed that certain persons, including Rajesh Mehta and Prakash had opened bank accounts solely for the purpose of depositing cash and then transferring the said funds in foreign exchange to countries like Hong Kong, Singapore and Dubai, in a fraudulent manner through the South Indian Bank and for this purpose they were using fictitious addresses and fraudulent documents. The loss of foreign exchange to the country on this account was to the tune of Rs 250 crore.
Prima facie, the transactions, which were put through the South Indian Bank’s Nariman Point branch, constituted offences under the Foreign Exchange Regulation Act, 1973. The matter was, therefore, referred to the Foreign Exchange Enforcement Directorate, Bombay. Intelligence gathered by the ED indicated that these activities were not limited to the South Indian Bank, but similar remittances were effected through other banks, notably the United Commercial Bank, D.N. Road, Bombay.
In February 1996, ED officers conducted searches at a number of places and interrogated a large number of persons, including bank officials, who were arrested under the provisions of the Foreign Exchange Regulation Act, 1973.
Investigations revealed that remittances totaling US $160.94 million (equivalent to Rs 546.78 crore), were effected through 12 different banks in Bombay during the period 1991–95.
Broadly, the following modus operandi was followed:
1. Persons involved in this racket, with the help of middlemen, recruited front persons for opening a number of accounts in the names of fictitious and non-existing firms.
2. Large amounts of cash were deposited in these accounts and immediately after deposits were made, documents purportedly relating to goods imported into India by these firms were submitted to the banks concerned.
3. On the basis of such documents, the banks were effecting remittances favouring the ‘overseas suppliers’ to goods. This modus operandi was used for flight of capital using official banking channels.
Investigations conducted revealed that the main persons involved in this racket were Dinesh C. Bhuva and Hemant Barot, who have been absconding ever since it came to light that they were the real brains behind the racket. However, a major breakthrough was achieved by the ED when they succeeded in apprehending a member of this cartel— Harshad P. Mehta (not the Big Bull), whose interrogation provided numerous clues and vital information related to this case.
The money laundering syndicate headed by Dinesh C. Bhuva and Hemant Barot adopted the following techniques:
1. Middlemen were employed to recruit persons of small means for opening bank accounts in the names of fictitious firms, for depositing cash and pay orders. These deposits were utilized for making remittances, against (fraudulent) documents covering imports.
2. For depositing cash or pay orders obtained from other banks.
3. For maintaining proper liaison with bank officials to ensure the transactions were conducted smoothly.
4. Specialized in preparing forged documents, viz., bills of entry, packing lists, invoices, Customs duty paying documents and other related documents like bills of lading, insurance, etc., to cover fictitious imports.
5. For contacting financiers who could lend money to the racketeers.
6. For opening bank accounts in places like Hong Kong for receiving foreign exchange remittances from India. All bank papers, including signed cheque books, were taken over in advance from those persons for withdrawal of foreign exchange remitted from Indian banks to these accounts.
7. To sell foreign exchange so obtained in Hong Kong to gold smugglers, exporters (who need foreign exchange for meeting their requirements of over-invoiced exports), importers (who need foreign exchange to meet their requirements of under-invoiced imports), and others who need foreign currency for various purposes.
One of the precautions taken in all these transactions was to conceal the identity of the cartel’s top hierarchy and for this purpose, only middlemen were used for all transactions and for locating people who would open bank accounts in India and abroad, for depositing cash and pay orders, for obtaining fictitious documents to show that imports have been effected into India and for maintaining liaison with the bank officials.
The twelve Indian banks and foreign banks, with branches in India, involved in making bogus remittances to the tune of US $160.94 million (Rs 546.78 crores) were South Indian Bank, United Commercial Bank, Dena Bank, State Bank of Indore, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Saraswat Co-operative Bank, Andhra Bank, Union Bank of India, ANZ Grindlays Bank, British Bank of the Middle East and Standard Chartered Bank.
The foreign banks to whom remittances were sent from India were The Hongkong and Shanghai Banking Corporation’s Queens Road, Wanchai, Hennesey Road and Kowloon branches, and Bank of India, Singapore. The amounts were remitted into the accounts of nine shell companies and four individuals. Nearly 33 persons were been arrested during the period February 1996 to June 1996. This case study clearly indicates as to how a criminal syndicate can set up, within a short span, a well-organised apparatus for money laundering without revealing the identity of the top racketeers. It also indicates as to how the banking system is vulnerable to such operations and how the banking staff can be subverted. It is, therefore, necessary to emphasize the importance of implementing the recommendations of the Financial Action Task Force (FATF) immediately and, in particular, to take up reasonable measures to obtain information about the true identity of the persons on whose behalf an account is being opened or transactions are being conducted. The financial institution should keep records on customer identification. It is also necessary to observe due diligence and pay special attention to all complex and unusually large transactions which have no apparent economic, visible or lawful purpose. Suspicious transactions must be reported to the competent authorities to investigate, whether the financial institutions are being used as conduits for money laundering operations.
Black Money Bane
As of December 2015, money held by India in Swiss Banks stood Swiss Francs 1.20 billion. In 2008, the amount was $1,891 billion.
Between 1948 and 2008, tax evasion, crime and corruption have removed gross illicit assets from India worth $462 billion
In 2008, India lost an equivalent of about 36% of its GDP.
Nearly $770 billion in black money entered India during 2004-2014. Nearly US $165 billion exited the country during the same period.
During 2014 alone, about $101 billion black money entered the country, while $23 billion exited.
Approximately $197 billion flowed out of the 48 poorest developing countries into many developed countries during 1990-2008.
At least $72.7 billion worth of assets have moved from India to secretive offshore jurisdictions between 1976 and 2010.