Trade-Based Money Laundering & its Challenges to Anti Money Laundering Laws in India

Introduction:

The term ‘money laundering’ is often defined as a collective procedure involved in legitimising the illegal or criminal proceeds using the loopholes in the legal framework. In most of the jurisdictions, the method of securing one’s ill-proceeds from the State scrutiny or laws has established an informal value transfer system, like a parallel banking system which is not authorised by the state but has caused a significant impact on most of the economies as it served a passage for people to move their money (ill) cross-border or overseas.

In the context of India regarding money laundering, the country has been vulnerable and contentious. India has been classified as a high-risk zone in terms of money laundering. Out of 149 countries, India was ranked 78^th for the year 2016, by the Anti-Money Laundering (AML) Basel Index.[1]Due to such an act of manipulation and false-invoicing, India is also the nurturer of a thriving black economy. The total amount of the black economy of the country is about $68.59billions making it the third-largest black markets centre in the whole of the Asian Continent. Hence, such situations created by TBML poeses possibilities for the existence of parallel economies.

TBML and Methods Opted for Invoice Manipulations

Trade-Based Money Laundering is the procedure via which the illicit transactions are made in accordance to convert criminal proceeds into legitimise capital. As anti-money laundering controls evolve, offenders find new ways to transform the financial proceeds of crime into legitimate funds via TBML. It operates by taking advantage of the complexity of trade systems, most prominently in an international context, where the involvement of multiple jurisdictions and parties make the AML (Anti-Money Laundering) checks and customer due-diligence processes more intricate and time-consuming. TBML, usually as well as primitively, involves the import and export of goods and exploitation of a variety of cross-border financial instruments.

Even after twelve years of the Financial Action Task Force’s (FATF) first advisory report, TBML remains the most refined method to launder illicit proceeds and move value within/across country borders, in the fascia of legitimate trade transactions. Hundreds of billions of dollars are laundered via TBML annually that has become a global peril.[2]

Methods

These are few most common methods of manipulation that are practiced worldwide[3];

• Over-Invoicing – The exporter submits an inflated invoice to the importer, generating a payment that exceeds the value of the shipped goods. Greater value is transferred from the importer to the exporter.
• Multiple-Invoicing – The exporter invoices multiple times for the same shipment, transferring greater value from the importer to the exporter.
• Under-Invoicing – The exporter submits a deflated invoice to the importer, shipping goods with greater value and transferring that value to the importer.
• Over or Under Shipment – The exporter ships more goods than previously agreed to with the importer, thereby transferring greater value to the importer. Alternatively, the exporter ships fewer goods than agreed, transferring greater value to the exporter.
• Misrepresentation of Quality – Goods shipped to importers are misrepresented on official documentation as being of higher quality, thereby transferring greater value to the exporter.

Impact

Economies with growing or developing financial centres like India are more prone to vulnerability as compared to well-established or developed ones. If left unimpeded, money laundering can erode a nation’s economy by changing the demand for cash and by causing high inflation. In a nutshell, the following can be the impacts of money laundering[4];

• Potential damage to fiscal institutions and market
• Destabilises economy of the nation causing a financial crisis
• Escalates organised criminal (mafia) activities
• Give rise to tax evasion practices
• Discourage foreign investors
• Results in exchange and interests rates volatility

Need to Line Foreign Exchange Management Act (FEMA) with PMLA

FEMA was passed in 1999 by replacing FERA (Foreign Exchange Regulation Act). The act aims “to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”. Despite replacing FERA in 1999, the plight of the financial system due to money laundering via forex mechanism has not changed much.

The reason which assists in putting such pecuniary system in a vulnerable situation is the inadequacy controls or governance towards the procedures that are opted for laundering the money by criminals, as money laundering functions through the ambiguities of the legal framework only. A multi-agency financial group in India decided at a high-level conference that FEMA should be made a criminal offence as practices of money laundering via TBML mechanism (illegal hawala transactions, currency smuggling) has caused severe economic damage. Currently, breaches of FEMA are categorized as compoundable offences, meaning the offenders can only be fined or financially penalised but cannot be termed for imprisonment. In this meeting, both RBI and Directorate General of Foreign Trade consented to bring FEMA in line with the offences contained in the scheduled list (29 legislations have been termed scheduled offence) under Prevention of Money Laundering Act (PMLA) so that they can bring criminal prosecutions against those who commit offences under FEMA.[5] The agencies hope that by integrating the violations under FEMA with PMLA will make the criminal justice system more effective and provide a strong deterrent for those considering TBML operations.

Punishment of Offences under PMLA

For the offences of money laundering, that is defined under section 2 (u), Prevention of Money Laundering Act, 2002 prescribes rigorous imprisonment for a term of not less than 3-years and which may extend to 7-years under section 4 of the Act.

The imprisonment may extend to even 10-years in the case where the proceeds of crime related to an offence specified in Part IV of the Schedule (Narcotics and Drug money). The schedule annexed to the Act lists down an array of legislations, civil and criminal, which forms the basis of culpability under section 3, PMLA. In brief, a person shall only be liable under PMLA when the offence committed by him falls under any of the scheduled legislations annexed to the Act, otherwise, no criminal/civil charge of money laundering can be imposed upon him under section 3 of the Act. Thus, the offence of laundering the money via TBML gets away from the hold and scrutiny of PMLA as Foreign Exchange Management Act, 1999 is not enlisted in the scheduled legislation which hinders the justice system as the crime is of same intensity but has different approaches regarding interpretation.

Section 63 of the Act provides punishment for providing a false invoice or incorrect information pertaining to the transactions made. Sub Section (1) to Section 63 of the Act provides for imprisonment for a term which may extend to two years or with fine upto Rs.50,000 or both. [6]

Judicial Asseveration

Union of India v. Hassan Ali Khan & Anr.[7]

The accused was charged for the violation of sections 3A and 4 of FEMA for dealing in and acquiring and holding foreign exchange to the extent of Rs.36,000 crores approximately in Indian currency, in his Swiss account. Based on this fact, the Directorate of Enforcement arrested the culprit and produced him before Special Judge (under PMLA), but the demand for custody was rejected and he was set free on bail. The appeal was made in Supreme Court and the court set aside the order of Special Judge, PMLA and directed to take the accused in custody. Also, the contention was made by ED that based on evidence and facts on record prima facie, the offence is punishable under PMLA.

Hajra Iqbal Memon vs. Union of India[8]

An investigation by ED into suspected terror funding and hawala operations by the “D Company”, which brought the global money-laundering ring of Rs.3000 crore involving family members and associates of Lt. Iqbal Mirchi (former right-hand of Dawood Ibrahim) under its scanner. The agency registered the case under the violation of FEMA as transactions made were operated by creating ‘fictitious identities’ which again was in contravention of RBI guidelines and FEMA rules. However, the petitioner was granted interim bail.

Conclusion

Based on the discussion above, it can be asserted that there is an eminent need to merge FEMA in the scheduled lists under PMLA to combat crimes of TBML. To overcome the difficulties that TBML poses, fiscal institutions should look beyond their own AML provisions and seek coordination with other organizations, law enforcement agencies, and government authorities. Also, International authorities including the Financial Action Task Force (FATF) issues guidance and advice to help financial institutions detect and address TBML which should be adhered and complied by the national financial institutions in order to put a hold on such activities.

---

References:

[1] Anti-Money Laundering Basel Index Report, 2016.pdf

[2] “Trade Based Money Laundering”, Financial Action Task Force, Jun. (2006).

[3] Knowledge-Base, “Trade Based Money Laundering”, Comply-Advantage.

[4] Saxena, Paridhi. “Money Laundering in India”, NLU, Raipur.

[5] Ford, Mark. “Pressure on India to criminalise TBML and other financial crimes”, Trade Based Financial Crime News, (27^th Jan. 2020).

[6] “Consequences Of The Offence Under Prevention Of Money Laundering Act, 2002 – The Draconian Mandate”, Mondaq. (5^th May. 2017).

[7] [2011] 11 SCR 778.

[8] AIR 1999 Delhi 271