• PAGE ONE
• INDEX
• HOME

Case for `Prevention of Money Laundering Law'

U. Pancras

THE print and electronic media recently carried reports on a network of bankers and public servants, through which considerable sums of black money were laundered in certain nationalised banks in Kolkata and Port Blair. The modus operandi was that a bank draft would be obtained from one branch of a bank. Then, savings bank accounts and fixed deposits were created and operated in other branches of the same bank, or even in other banks, in some well-known names.

Prevention of Money Laundering Bill

This is a clear case of money laundering, and the CBI is reported to be investigating the case. To prevent such money laundering, a specific law was thought of in 1998. A draft Bill, called the Prevention of Money Laundering Bill (PMLB), was introduced a nd discussed in Parliament, and it was felt that it required further detailed review.

It was subsequently discussed by a subcommittee and put up once more in 1999. It ran into rough weather again, several queries were raised and it was sent back to a subcommittee for improving/modifying various provisions before presentation to Parliament for passing into law. We do not know the status of the Bill now in July 2001. The main features of the Bill, presented for the second time, and which are relevant for our current discussion, are given below.

Money laundering is defined as the act of acquiring, owning, possessing, concealing or transferring any proceeds of crime and knowingly entering into any transaction related to the proceeds of a crime listed in the schedule. These are the offences under Indian Penal Code, such as murder, kidnapping and extortion, offences relating to immoral traffic, and to arms, narcotic drugs and corruption.

Every banking company and financial institution, including non-banking finance companies, must verify and maintain the identity of all clients in the prescribed manner. Further, the organisation must maintain a record of all transactions, the nature and value of which may be prescribed, and furnish the information of referred transaction to the authorities within the time specified. The concerned authority may on his own or, on report from others, make such enquiries and proceed with it in the manner ne cessary.

The PMLB has the lofty objective of preventing or controlling the basic crimes related to IPC, narcotics, corruption, and so on, by blocking the money obtained through such crimes, from entering into the mainstream of finance and which is likely to be us ed for similar crimes. Such well-meaning legislation could not get through Parliament and the expert committee. The main issues of contention are dealt with below.

The definition of money laundering is itself questionable. Whether the act of possession of the money, knowingly or unknowingly, should be considered a money laundering offence is the point. The powers of the enforcing and adjudicating authorities are co nsidered too wide.

Certain safeguards were suggested to prevent unnecessary summons, searches and seizures by authorities who should commit in writing the definite grounds for their actions. They should be answerable if the suspect was cleared or acquitted. There was also an opinion that whereas the Foreign Exchange Management Act (FEMA) was aimed at liberalising the FERA, its twin bill -- the PMLB -- seeks to bring in more controls. The PMLB should be liberalised, and should cover only narcotics and terrorism-r elated offences.

The schedule of crimes does not include some important areas, such as exchange manipulation and hawala operations, which are the main sources of money laundering at the international level. The crime of falsification of accounts was earlier considered a criminal office in the Bill. It was then felt by industry representatives that it should be seen as a civil offence and not a criminal one. This has since been deleted from the schedule.

Money laundering follows another crime, which is called the basic crime, such as the ones listed in the schedule. A lot has been written about the responsibility of proving one's intention or innocence in the case of a money laundering offence. The diffi culty and confusion result when the responsibility of proving this lies with one party in the case of a basic crime, and with another party -- the accused -- in the secondary crime of money laundering.

India's international position

The General Assembly of United Nations adopted in February 1990 the political declaration and a global programme of action to prevent money laundering and to provide for confiscation of property derived from money laundering. The UN further called upon i ts member-states in June 1998 to adopt national money laundering legislation and programmes. Hence, this legislation on Prevention of Money Laundering.

In continuation of this international effort, a Financial Action Task Force (FATF) on Money Laundering was formed as an inter-governmental body whose purpose is the development and promotion of policies to combat money laundering. Twenty-six countries ar e members. These include almost all the Western nations, Japan, Singapore, Hong Kong, and others. India is not a member of the FATF. There are a few recommendations by the FATF relating to the financial system. These are relevant as the present cases in India involve the commercial banks. They are discussed below.

Identification of the customer and his representatives should have been made by a public register or document, or from another customer, or both. The elements of information to be identified are the name, legal form, address, director and the provision r egulating his power to bind the entity. Identification should be made at the time of opening the account or safe deposit boxes and entering into large cash transactions.

The financial institutions (FIs) should pay special attention to all complex, unusually-large transactions, and all unusual patterns of transactions which have no apparent economic or visible and lawful purpose, or if they suspect that funds are from a c riminal activity. They are required to report the same to the authorities concerned.

The FIs should develop programmes against money laundering in the form of internal policies, procedures and controls, besides training the officers and putting in place the adequate audit functions. Banks and other financial institutions and intermediari es should report all domestic and international transactions above a fixed amount to a national central agency.

Comments on the recommendations

Some comments on these recommendations are worthwhile in the context of the recent case of money laundering.

The identification of a potential customer and his representatives by a customer is obligatory in the banking system before a bank account is opened. Obviously, that function or requirement of identification was carried out perfunctorily in this case. Ot herwise, such leading names as Saurav Ganguly, Bobby Kapoor and David Dhavan would not have passed through. This shows that people are ready to take risks by dumping their duty. With regard to reporting all the complex and unusual patterns of transaction by the bank, it failed to do so. It is presumably because the law did not require them to report the same. It is as simple as that.

As for reporting the transaction of a certain minimum value, this provision was included in the Bill under discussion, which is yet to become law. The maximum figure of Rs 25 lakh as the limit of one or a series of transactions in a month was indicated i n the Bill originally. But the specific amount has been deleted, with the statement that the amount, the frequency and manner of reporting would be prescribed later by the competent authority. It is not clear whether the amount will be increased or reduc ed.

It is interesting to know that the specified amount in similar law in the US is only $10,000. The US maintains a Currency Transaction Report (CTR) to be submitted by the banks and stipulates that cash deposits of $10,000 and more be reported. When this a mount is converted into rupees, it is less than Rs 5 lakh. The comparative money value of currencies make the limit of Rs 25 lakh or even Rs 5 lakh seem rather high. A much lower limit of Rs 50,000 or Rs 1,00,000 may be in order!

There are other observations relating to the requirement that the adjudicating authority should be a group and not an individual. A chartered accountant should also be included in the Appellate Authority.

The requirement of reporting by the financial institutions of suspicious cases and persons is, obviously, tricky. The method by which the suspects would be spotted may not be easy to evolve and practise. However, the FATF had recommended on this issue ca tegorically. It has been reported that in a scheme in the UK, the possible criminal offences bank staff may commit are identified and listed.

*Assisting money launderer carries up to 14 years imprisonment, fine, or both.

*Tipping the launderer carries 5 years imprisonment, fine, or both, and

*Failure to report the suspects carries 5 years imprisonment, fine, or both.

What appears as formidable could be solved through the system called neural networks which are a combination of computer software and chips capable of mimicking human brain's functions. At present, such neural networks are used in banks in the West; the computer, with the help of neural network can daily scan the operations in millions of accounts and bring out, say, a 100 potential suspects a day for manual scanning, which is considered a manageable volume by a bank. India, with its IT prowess, should be able to assist the banking industry in tackling this issue.

What should be done?

Peter Lilley, in his book Dirty Dealing: The untold truth about global money laundering, says money laundering is a growing problem in India, though largely confined to domestic activities that are not only drug-related -- which is the case with many cou ntries where money laundering is rife. Fraud, corruption and smuggling are the obvious crimes in India. The case mentioned at the beginning of the article perhaps fits very much into this picture of India drawn by the author.

India is a signatory to the UN Resolution of 1998, whereby it agreed to take legal steps to prevent money laundering. The draft Bill was discussed twice -- in 1998 and 1999 -- in both Lok Sabha and Rajya Sabha and in various subcommittees. B ut it has still not become law. In the meantime, several cases of money laundering through the banking system have cropped up. People believe this may be just the proverbial tip of the iceberg.

Though there is every ground to believe that the bank officers were directly involved in the crime, there is still no system in place by which such crimes are automatically brought to light, rather than through the efforts of informers, and that too afte r four years of operations.

One cannot expect that the discussions by eminent persons and in high places will result in a perfect law. To quote the eminent jurist Nani Palkhiwala ``Doubtless, the law is imperfect; it would be imperfect even if it were made by a committee of archang els''. One cannot also expect that the law would benefit all sections of society. The most important money-laundering preventive steps are that the government must criminalise money laundering, the offenders must be prosecuted and convicted, and the proc eeds of the crime be confiscated.

The law on Prevention of Money Laundering should be passed as soon as possible, in whatever shape and status it attains after discussion and review. Banks and similar institutions should put in place the adequate procedures, not only to identify the peop le opening the accounts with them, but also to bring to light automatically any suspicious transactions and people, and report them to the authorities. The Prevention of Money Laundering Bill, if passed into law, would provide the right impetus to the fi nancial system to prevent money laundering and thus control the basic crimes connected with it.

(The author is a faculty member at the Panimalar Institute of Management Studies and Computer Science, Chennai.)