NEW TRENDS IN MONEY LAUNDERING IN INDIA --
A SITUATIONAL STUDY OF MUMBAI
Dr. (Mrs.) P.N. SARAVADE, Superintendent of Police, Bank Securities and Fraud Cell, Central Bureau of Investigation, Mumbai and SUSHIL P. SINGH, Inspector of Police, BS&FC, CBI, Mumbai
CRIME has always remained a part and parcel of human society. With the passage of time, the criminals have evolved innovative methods to perpetrate crime and to get out of the clutches of the law-enforcing agencies. Of late, in India, white-collar crimes are on the rise and these white-collar criminals have evolved novel means of converting their ill-gotten wealth into assets, both inside and outside the country.
Over a period of time, capital flow from one part of the world to another part of the world to another part of the world has increased dramatically due to economic globalization and economic liberalization. This increase in the capital flow often becomes conducive for laundering of black money. Money laundering can be defined as an activity through which illegal money is layered in cyclical transactions, so that it comes out at the other end as legal money for legitimate use.
Money laundering is a global phenomenon that affects all countries in varying degrees. By its very nature, it is a hidden activity and, therefore, the magnitude of the problem and the accurate quantification of black money being generated either in our country or throughout the world has always been an impossible task.
Money laundering is not done through any set out method. Several methods are used by the criminals for this purpose. The conventional way of money laundering in India has been through Hawala transactions. Other methods range from purchase and resale of luxury items to passing money through a complex international web of legitimate businesses and "shell" companies (i.e. those companies which primarily exist only as a registered legal entity without any genuine business activity).
In India, black money generated through frauds on financial institutions, generally has, as its source, credit frauds or fake bill discounting. In both these types of frauds, a necessary ingredient is "shell or front" companies. These shell companies issue their bill/Hundis and invoices accompanied by bogus transport receipts in order to obtain funds against such documents from bank/financial institutions. The parties which avail these financial facilities from the banks, then divert a major part of such proceeds by issue of cheques in the names of non-existent, front companies, belonging to persons, who in Mumbai business parlance, are known as 'cheque discounters'. These 'cheque discounters' then hand over immediate cash to the party after deduction of their commission. This process is commonly known as "cheque discounting". Thus, by layering this fraudulently obtained wealth through these cheque discounters, a white-collar criminal is able to enjoy his black money legitimately.
In Mumbai, it has been noticed that a large number of groups of private individuals are operating in this business of 'cheque discounting'. These groups have no underlying trading or manufacturing activities and they basically operate from the Gulalwadi, Kalbadevi and Masjid Bunder areas of Mumbai. The persons running these firms are generally associated with the chemicals market and the metal market, since there is a voluminous market in these commodities in Mumbai and fake transactions in these commodities can largely go unnoticed. The modus operandi adopted by these persons is very simple. Generally, they approach a Cooperative Bank and sometimes even a Nationalized Bank and open an account with the introduction of an account holder, who account is dormant. Thereafter, a number of accounts in a series are opened in the same bank or in different banks/branches, in the names of different Proprietorship/Partnership firms by the introduction of one another. The addresses of these firms are generally fictitious and they are not engaged in any legitimate business activity.
All such firms of a cartel are controlled by an individual, who keeps blank, signed cheque books of all these accounts. The identity and whereabouts of these individuals are known to all the big industrial houses as well as all the businessmen who generate some black money during the course of their routine business. These cheque discounters are found to have a well-knit network and they undertake the job of generating cash through the abovesaid accounts of non-existent firms.
Cheque discounting is also a unique phenomenon for immediate liquidity, in which businessmen or business houses, which may want to generate immediate cash, issue one or more cheques of any amount in the names of the fictitious firms of the cheque discounters. These cheques are handed over to the head of the concerned cartel of cheque discounters. The man running the cartel takes the cheques and in lieu, immediately hands over cash to the person concerned, after deducting his commission of 1%. Thereafter, the cheques are deposited by him in the concerned accounts and he gets the credit after clearing, the next day. If he does not get credit in the concerned account, he continues to charge a commission of 1% till he gets his funds. This process is, therefore, like in Hawala transactions, based on trust between the transacting parties. The process is also not legally recognized, since it is conducted outside the recognized financial systems of our country.
These cartels also help business in availing funds from banks through 'kite flying operations' in cheques. The cartel chief issues a number of cheques to the concerned businessman/industrial house, at a commission of 0.5%. The concerned businessman deposits the said cheques in one or more of his accounts in a bank, where he has managed to get a cheque discounting facility and obtains immediate credit in his accounts, knowing fully well that the cheques deposited by him were not going to be passed in clearing. Once these cheques are returned unpaid, the businessman obtains more cheques from the cartel owner and deposits them in his account, some of these may be honoured and some may bounce. Thus, a series of transaction are undertaken in cheques through a number of accounts involving two or more banks, obviously in connivance with at least one of the Bank Mangers. In the process, the businessman avails free/low interest funds from the bank and the cheque discounter gets his huge commission.
Mumbai, being the financial capital of our country is also one of the main centres, where a lot of black money is generated through Real Estate deals as well as through smuggling of luxury items and precious metal and under-invoicing/over-invoicing of exports and imports. The cheque discounters, who also issue/arrange for cheques, fake LCs and false bills, are playing a major role in helping the white-collar criminal to convert his ill-gotten money into legal tender. The large liquidity of cash as a result of this laundering process, is further put to profitable use by the cheque discounters, by making this money available to big businessmen at an exorbitant cost. This must surely be having some spiral effect on our economy as a whole.
It has been observed that these shell firms, who issue bills without any genuine transactions, are duly registered with the Sales Tax Authorities. However, there is no underlying trading/manufacturing activity, carried out by these firms. As these firms mention their fictitious address for their Bank Accounts and also to the Sales Tax Authorities, the Sales Tax Authorities are unable to trace the owners of such firms, and the maximum action taken against such firms by Sales Tax is freezing of the Bank Accounts of the firms/companies concerned. But it is generally a late step and does not affect the cheque discounting business of the cartel.
The unique feature noticed in the matter of these cheque discounters is that a large number of them file their income-tax returns, in which they show their commission of 1%/ 0.5% as income. As such they also evade the clutches of Income Tax Laws.
Keeping in view the havoc caused by these cheque discounters/drawers of bogus bills, a serious thought has to be given by the law enforcement agencies/law-makers and Bank Regulators as well, to find out some ways and means to curb this menace and frame stringent laws for initiating punitive action against cheque discounters.
Article publihed in CBI Bulletin, May 1999