Money Laundering in India

Tucked away in the government files is a strong indictment of India's record in tracking money laundering by the world body for financial intelligence, of which India also is a member. If we are to get a sense of why the debate on black money is climbing all the wrong trees, this report is worth examining.

The report by the Financial Action Task Force (FATF), which brings together the top 34 countries of the world and two multi-lateral bodies in a closed group, has noted that since 2006, when India passed its money laundering Act till now, not a single case has finally reached conviction.

The Act is in place, the prosecuting agencies are in place, the courts are ready, but only the villains are missing.

To get a sense of why this is a big problem, just remember India has one of the largest financial sectors in the world. But despite the size of our banking sector, the stock exchanges, the insurance sector et al, not one case has reached its logical outcome. This is also despite the setting up of a Financial Intelligence Unit (FIU) meant to track fishy movements of money in and out of the economy around the same time.

The report says: "The FIU has been operational and receiving suspicious transactions reports since March 2006 ... the total number of (these reports) has been rising. (But) the filings appear to be extremely low in relation to the size of the financial system, the scale of economic activity and the reported levels of proceeds-generating crimes".

This means the government has the means and more to track the flow of finance from questionable sources. The issue is one of prosecution. The implication is if the Indian government agencies go about their duties, there would not be too much of a necessity to go around complaining about how the assorted banks abroad do not support us in tracking illegal income. Several commentators in this paper have said so, but it bears repeating that unless we can clearly develop evidence of illegality in tax cases here, no country will help us with a fishing expedition.

The weakness in the prosecution is also the reason why, the FATF in another place in the report says, often countries have reported problems in international co-operation via formal legal channels with India. "These problems relate to the delay in the Indian authorities' response when providing (information on) money laundering activities".

So our problem with the Swiss banks is they don't want to provide information and ours with the rest of the world is that we cannot provide information.

One disclaimer is in order here. Money laundering is not co-terminus with black money generation, but is a more severe offence, yet it is also easier to track.

How serious the problem on money laundering is can be gauged from another piece of evidence from the same Mutual Evaluation Report. By the way, the report is not secret and can be accessed by FE readers from the FATF site. The contents of the report are also something that the Indian government is aware of as there were wide ranging discussions with all concerned officials before it was published, the report notes.

The evidence I refer to is about the civil society. Noting that tax evasion problems impacts this sector too, the report says except under the Income Tax Act and the Foreign Contribution (Regulation) Act, the non-profit sector is subject to limited or no monitoring and supervision. Very few of these organisations are registered under these Acts. And then it says, "While Indian officials indicated that they believe the financial terrorism risk in (this) sector is small, it is difficult to understand how they can maintain this confidence, in light of the fact that they were unable to state the size, wealth and activities of the majority of non-profit organisations in India".

We, therefore, come to the conclusion that the problem of unaccounted money in India is essentially a domestic problem where the NGOs, too, may be culpable to some extent.

A few years ago, the NDA government planned to tax the charitable organisations based on a report issued by noted economist Parthasarathi Shome, who, in turn, used an estimate prepared by Hiranya Mukhopadhyay (then in NIPFP) and Arbind Modi (GOI). The report had made a conservative assessment that tax evasion by the sector was at least R7,000 crore, which meant about R25,000 crore of unaccounted money.

The report created such a furore that the government had to drop the plan and, despite impressive follow-on efforts by P Chidambaram, has got nowhere.

There are, therefore, two strands in the argument on black money generated in the Indian economy. At one level, the problem is of weak pursuit of existing laws and, at the other level, where there are vested interests, those have created impressive firewalls to block investigations. Another is the exemption that the trader class has extracted from the government in the value added tax. The tax exempts all establishments with a turnover of less than R50 lakh per year. Both small traders and the NGOs are radical supporters of the current anti-graft campaign.

So where does the black money trail lead us to. At one level, will it mean restoration of the income tax department's power to conduct search and seizure operations? Those powers were severely curtailed by recent governments as there were complaints of harassment by tax officials. Will this pass muster with a new restive population?

The other is the use of the government's new found clout vis-à-vis countries abroad. In Budget 2011-12, the finance ministry has written in a provision that allows it to classify all transactions with a country as suspicious, over-riding all tax treaties if it feels there are enough grounds to do so. The operative provision here is again the prosecuting efficiency of our revenue department to gather evidence to lead up to such a black list. We are back to where we began, i.e., the need to successfully conclude our first money laundering investigation.