Indian Parliament Moves to Finally Implement Money Laundering Laws
May 05, 05In terms of anti-money laundering (AML) and combating the financing of terrorism (CFT) legislation, the Indian diamond industry finds itself in a similar situation to the Belgian diamond industry a few years ago: the government has enacted extensive legislation, but the implementation has been postponed until the necessary enabling legislation and rules have been promulgated. There is considerable anecdotal evidence that prominent Indian diamond concerns and domestic banks (that are dealing with foreign transactions) have already begun putting systems in place to meet the overseas compliance standards, rather than waiting for domestic imperatives to do so.
But now things are moving. Last week the Indian parliament, Lok Sabha, began its debates on The Prevention of Money-Laundering (Amendment) Bill, 2005 (PMLA), which will clear up the confusion over which agency will investigate money laundering, with the Enforcement Directorate (ED) becoming authorized to do the job. This decision, by Union Finance Minister Palaniappan Chidambaram, represents a major leap towards implementation of the AML/CFT laws in India. According to international accounting firms, India is estimated to have a parallel economy of nearly 40 percent of its $600 billion gross domestic product. To move activities to the formal economy, Minister Chidambaram says he will impose a levy of 0.1 percent on single cash withdrawals of 10,000 rupees ($228.5) and above as part of an anti-tax evasion drive. Many large transactions in India are still cash driven and the proposal is aimed at encouraging the use of checks or credit cards, both of which leave a paper trail.
That proposal has a long way to go and is unlikely to be enacted, but the minister’s decision to reaffirm the selection of the Enforcement Directorate (ED) to implement the AML/CFT laws is very interesting. Diamond industry sources have explained to me that until now ED has been mainly concerned with the enforcement of the provisions of the Foreign Exchange Regulation Act to prevent leakage of foreign exchange which generally occurs through the following illegal activities:
(1) Remittances by Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments.
(2) Acquisition of foreign currency illegally by persons in India from foreign tourists.
(3) Non-repatriation of the proceeds of exported goods.
(4) Unauthorized maintenance of accounts in foreign countries.
(5) Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation.
(6) Siphoning off of foreign exchange against fictitious and bogus imports.
(7) Illegal acquisition of foreign exchange through hawala and
(8) Secreting of commissions abroad.
Even without the new authority as the enforcement unit for the AML/CFT laws, the Directorate already possessed the authority to conduct searches of suspected persons, conveyances and to enter premises for seizing incriminating materials (including Indian and foreign currencies involved) and/or to enquire into and investigate suspected violations of provisions of the Foreign Exchange Regulation Act. It is allowed to levy penalties and to confiscate the amounts involved in contraventions. As the ED can set penalties it is both the accuser, prosecutor and judge – it holds awesome powers.
The recent flurry of activity in the Indian Parliament is partly attributed to prodding by the United States, and by international banks and accounting firms, which, all for their own reasons, want India to become internationally AML/CFT compliant. The United States maintains that “India’s status as a growing regional financial center, the existence of a large system of informal cross border money flows (hawala), and widely perceived tax avoidance make India vulnerable to money laundering activities. India is a major drug-transit country. Some common sources of illegal proceeds in India are narcotics-trafficking, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion.” The emphasis on diamonds appears in the original U.S. Department of State document.
“India’s historically strict foreign-exchange laws, transaction reporting requirements, and the banking industry’s know-your-customer policy make it difficult for criminals to use banks or other financial institutions to launder money. Large portions of illegal proceeds are accordingly laundered through the alternative remittance system called “hawala” or “hundi.” The hawala market is estimated at anywhere between 20 and 50 percent of the formal market. Remittances to India reported through legal, formal channels in 2003-2004 amounted to $18 billion,” says the U.S. Department of State.
Indian diamond dealers have repeatedly explained to me that the industry doesn’t use hawala. The most common usage of this system (through which individuals transfer funds or other items of value from one country to another, often without the actual movement of currency) is mostly for the repatriation of wages earned by non-resident Indians working overseas and transferred home to support their families. It is important to stress that international publications – and, again, foremost the U.S. Department of State – never miss an opportunity to suggest that diamonds are somehow involved in the so-called trade-based money laundering.
For ordinary Indians the use of hawala is fully consistent with long-term traditions, while “anecdotal evidence suggests,” concedes the Department of State, “that many Indians do not trust banks and prefer to avoid the lengthy paperwork required to complete a money transfer through a financial institution. Hawala dealers can provide the same service with little or no documentation and at rates less than those charged by banks. The Government of India neither regulates hawala dealers nor requires them to register with the government; the Reserve Bank of India (RBI), the country’s Central Bank, argues that hawala dealers cannot be registered or regulated because the system (though widespread) is illegal”.
The assurances that the Indian diamond industry stays away from hawala apparently failed to convince the U.S. Department of State. Says a departmental report: “In recent years, it is believed that the growing Indian diamond trade has also been increasingly important in providing counter-valuation or a method of “balancing the books” in external hawala transactions. Invoice manipulation (for example, inaccurately reflecting the value of a good sold on the invoice) is pervasive and is used extensively to both avoid customs duties and taxes and to launder illicit proceeds through trade-based money laundering.”
Why is all of this so relevant today? India’s “Prevention of Money Laundering Act (PMLA),
That is now being changed. Once the amendment bill that has now been introduced is passed by Parliament, the Finance Ministry will issue a formal notification handing investigating powers to the Enforcement Directorate (ED). Why did it take so long? The original money laundering law, which came into existence more than two years ago, had sparked off a hot race between various Indian financial agencies and intelligence units, including the ED, Income Tax and Directorate of Revenue Intelligence (DRI), to get the powers to investigate money laundering offences. These, as well as some other technical errors in the original bill, were responsible for the delay in designating an executing agency.
Reports in Mumbai note that the new amendment also seeks to clear the confusion in the Act defining occasions when the police can step in and probe money laundering offences. Had it not been clearly spelt out, it would have led to a mess at the ground level since the local police as well as the designated agency could have ended up probing the same offence, said sources.
With all the activities in Parliament, it is clear that anti-money laundering guidelines have evolved to be more stringent in countries such as the U.S., Europe and elsewhere than in India. In many respects, in India, rules are believed to be in their infancy. But when the enabling legislation has been passed and the rules are issued, the “initiative” may move to the discretion of local mid or low level enforcement officials. Even if everything is “perfect” and there is no reason for concern, investigations are inclined to have the tendency to paralyze one’s business. But that is of minor concern.
What bothers me more than anything else, however, is the fact that the United States seems convinced that the diamond industry is part of the problem. This is something which should ring an alarm bell among the Indian diamond industry’s leadership. The State Department’s “annual narcotics report”, which, by law, must report to the U.S. Congress on the developments in the money laundering field, concludes its analysis of India as follows:
“Terrorist financing in India, as well as in much of the subcontinent, is linked to the hawala system.
The Government of India should cooperate fully with international initiatives to provide increased transparency in hawala, and, if necessary, should increase law enforcement actions in this area. Indian citizens’ involvement in the underworld of the international diamond trade should be examined. [Emphasis added.] India should pursue efforts to join the Financial Action Task Force (FATF). It also needs to quickly finalize the implementing regulations to the anti-money laundering law and establish the new Financial Intelligence Unit (FIU) in order to enhance information sharing with its counterparts around the world. Meaningful tax reform will also assist in negating the popularity of hawala and lessen money laundering. Increased enforcement action should also be taken to combat invoice manipulation and trade-based money laundering.”
India is the world’s largest diamond center. For it to become pro-active and to convince the United States that it is darned wrong is becoming a greater imperative by the day. And because of the centrality of India in the diamond industry, this is something of concern for all of us. The last thing anyone should want is having over-zealous government officials using their new authority to try to please the Americans – in the wrong way!