ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Money Laundering in Perspective

in Perspective Crime and Money Laundering: The Indian Perspective by Jyoti Trehan; Oxford University Press, New Delhi,
PRAFUL BIDWAI Among the many varieties of corrupt and criminal financial practices prevalent in the world, perhaps none is as economically damaging as the flight of capital planned and executed systematically by tax evaders, financial racketeers, bribetakers, arms traders, extortionists, drug traffickers, mafia-style criminals, and of course,

Money Launderingin Perspective

Crime and Money Laundering: The Indian Perspective

by Jyoti Trehan; Oxford University Press, New Delhi, 2004; pp 251, Rs 450.


mong the many varieties of corrupt and criminal financial practices prevalent in the world, perhaps none is as economically damaging as the flight of capital planned and executed systematically by tax evaders, financial racketeers, bribetakers, arms traders, extortionists, drug traffickers, mafia-style criminals, and of course, “normal” and “legitimate” businesses, which use sleazy means of capital transfer such as ‘hawala’ and underground networks, as well as perfectly “respectable” international banks operating “above board” and legitimately. The effect of capital flight is especially harsh on the economies of the third world and on the welfare of billions of people.

The magnitude of such flight is hard to estimate in a precise way for the simple reason that a good deal of the money is generated illegally or away from the law’s gaze; even where the wealth is generated legitimately, it is concealed from the authorities. There is no paper trail left worth the name. So hard numbers are difficult to come by. Yet, some rough figures are accepted as reasonable among the “experts” (including economists, accountants, bankers, crime investigators and the police) who deal with such matters. They are of the order of $ 1.5 trillion to 3 trillion, or about the size of the French economy (its legitimate component, of course).

This is a staggering number, equivalent to some 2 to 5 per cent of world GDP. It exceeds the flows of official development assistance or aid by a factor of 20 or 40. This money represents large-scale ‘loot’ or theft of national wealth by unscrupulous businessmen and criminals, and a massive drain on the resources of the countries of the global south.

Money Laundering Business

A good deal of such money spirited away abroad – to tax havens, or to secret bank accounts in numerous western countries – returns to its home country, or gets invested legitimately somewhere else, typically through sophisticated operations and complicated manoeuvres involving shell companies, trusts, offshore jurisdictions, remittances, gifts, amnesty schemes, government bonds and even wire transfers. It has now become laundered money: its illegal origins have been concealed, and it has become a legitimate hoard ready for investment in “above board” enterprises.

Some of these functions are undertaken by agencies specialised in private banking operations. Typically, these operations are handled by major international banks, including some of the largest transnational banks of the world.

Such returning capital flight, or “roundtripping”, is only one component of the global money laundering business, although it is probably the largest and most important one. Money laundering is also intimately linked to the global narcotics trade, as well as the financing of criminal syndicates and sub-state terrorist activities.

The money laundering business is enormous and globally ramified, but unevenly distributed. According to the financial analyst Kannan Srinivasan, “the US and UK account for the bulk of the world’s money laundering capital movements, but this has depended critically on money laundering operations in other parts of the world, in particular India, that has always been an important conduit for capital flight” (based on Kannan Srinivasan, Monash Asia Institute, in Vicziany (Controlling Arms and Terror: Regional Security in the Asia Pacific after Bali and Baghdad, Edward Elgar, forthcoming) and his paper presented at IDEA’s workshop ‘Financial Crime and Fragility under Financial Globalisation’, December 2005).

India’s Link

Historically, India has been a major link in the global financial chain associated with money laundering. This Indian role precedes independence. Way back in the 1930s and 1940s, Indian maharajahs or princes, as well as industrialists unsure of the future of the country, are believed to have transferred huge assets abroad. The volumes transferred probably increased greatly after the late 1960s, following the abolition of privy purses and nationalisation of major commercial banks. India’s contemporary importance in the money laundering business is recognised even by international financial institutions, and of course, major banks.

And yet, there are two major absences or gaps in the analysis of money laundering and strategies to counter it. First, major “international” (read, western or northern) agencies like the Financial Action Task Force – set up in 1989 by the governments of 20 countries – only recognise and focus on money laundering operations pertaining to the narcotics trade and serious crimes including terrorism (the force is largely composed of nominees of OECD states and operates out of the OECD office in Paris, although it is not a part of it).

This narrow focus flies in the face of what is known about the methods deployed

Economic and Political Weekly January 28, 2006

by drug lords and terrorist networks, which is that they use “mainstream” means and conduits, including legitimate banks,trusts and “respectable” tax havens, in addition to informal or crime-lined routes like hawala. As Srinivasan puts it: “terrorists are relative newcomers [to money laundering], who have skilfully employed widely available services…The Nine Eleven Commission in the US speaks of terrorist networks laundering less than half a million dollars over several years – a sum that will never show up on any radar screen.”

The OECD’s preoccupation with links between narcotics and terrorism and money laundering and its exclusion of a clear focus on the theft of national wealth from the global south, is explained both by the fact that the west is the principal destination of southern capital flight, and by the advocacy of capital account convertibility by the international financial institutions, in keeping with their policy dogmas.

The second absence pertains to India: there has been no worthwhile investigation or analysis (at least from within the country) of money laundering, which is focused on India. This absence is all the more glaring not only because India has a long history of hawala transactions, “double book-keeping”, mis-reporting of exports and imports and of remittances from the diaspora, all facilitating capital flight, but because India has opened up its economy over the past one-and-a-half decades to an unprecedented extent. This has vastly expanded the scope for spiriting funds out of the country (at the same time, thanks to India’s unremitting quest for foreign investment, there is greater scope for returning capital flight).

Analytical Perspective

The present book fills this gap and hence fulfils a vital need. It offers an incisive analytical perspective, besides a wealth of information on a range of issues related to crime and money laundering, both in its Indian and its global dimension. It is outstanding in its clarity and remarkable for the simplicity with which it presents complex empirical details to the lay reader. It deserves a warm welcome and should command serious attention.

India has now clearly emerged as a big player in the global money laundering business. It may be one of the greatest originators of capital flight anywhere in the world. India’s international trade probably offers the most important conduit for capital transfers.

Recently, Florida International University researchers tracked India’s trade with the US between 1993 and 1995 to look for abnormal pricing or evidence of underand over-invoicing. There was a plenty of evidence. They estimated that in 1995, capital flight from India to the US effected through the mis-pricing of trade was up to $ 5.58 billion. Says Srinivasan: “Were this maximum figure in the range to hold true for other countries with which India trades today, Indian money laundering through trade would exceed $ 50 billion annually”.

This figure is surely high enough to cause an alarm. As a rough estimate, it is fully in conformity with the rule-of-thumb that in many southern countries, the magnitude of the stock of capital flight is of the same order as the volume of external debt. Indeed, on this criteria, the estimate is conservative.

Whatever the precise number, the issue of money laundering and India merits close attention and analysis – and not just from policy-makers and law enforcers, but from academics, including economists, political scientists, sociologists, criminologists and students of political economy as well. The issue has acquired great topical relevance now that India has enacted a money laundering law, by finally passing a bill that was hanging fire since 1998.

The book under review introduces the reader to the subject through a series of steps ranging from organised crime and big money-related crime to economic scams, and from tax evasion to the mechanics and typologies of money laundering, identifying 24 means and routes in the process.

Of the five parts into which the book is divided, three are largely descriptive, but usefully so. They outline the growth of different kinds of financial crimes and evolution of money laundering, and discuss the measures that have been proposed or taken to combat it. Analytically, the author is at his most incisive while dealing with underground or parallel banking systems, such as hawala (and more), and in his critique of the Money Laundering Act, which has just been passed in India.

The author, a senior police officer, who worked as a Jawaharlal Nehru Memorial Fund Fellow, goes about his job with a schematic approach bordering at times on the didactic, but nevertheless engaging and highly accessible on account of its lucidity and lack of jargon. The book follows a fairly conventional theoretical framework in dealing with the political economy of financial crime and punishment.

One gets the impression that the framework generally goes along with the view that many financial crimes originate in excessive state controls – when much of the evidence points in the opposite direction. What facilitates capital flight is not excessive controls, but too little regulation within an overall context of kleptocracy. The kleptocracy thrives because there is little public accountability and too little democratic policy-making.

The author avoids the trap which many law-enforcers often fall into: an excessive preoccupation with the link between big crime and national sovereignty. He also recognises, unlike many neoliberal ideologues, that a number of policies adopted and measures taken in the process of liberalisation and globalisation call for greater, not less, regulation, and the need for a vigilant eye on such things as the under-selling of public sector enterprises to private companies, trading in international securities, banking and insurance and non-banking financial institutions, etc. He calls these “the perils” of “the economic liberalisation/reform process” and holds that liberalisation “would lead to generation of larger proceeds of crimes” and their laundering of “on a more extensive scale”.

Perhaps the greatest merit of the book lies in its analysis of underground and parallel banking systems such as money transmission services in places like Hong Kong, Singapore, Dubai, London and New York. Important here are the southern systems like “hundi/hawala, chop shop/ chitti banking” and “black market peso exchange”, and their links with modern money transmission services, rapid intracommunity transactions based on “trust”, and high-speed communications. Some of these informal systems go back to the middle ages and enjoy a high level of acceptance among the Indian and Chinese diaspora.

There is, besides, an extensive and growing international network of Indian businessmen. This is based on trade in diamonds ($ 10 billion-plus), and gold (India remains one of the largest importers of legitimate as well as smuggled gold) and on scores of inter-connected family-based operators, who coordinate their business takeover strategies and so on with one another. Some of these trade links have

Economic and Political Weekly January 28, 2006 grown through a consolidation of money laundering solidarities and growing techniques of concealment. Chapters XII to XVII provide good illustrations of the laundering operations involved in the diamond and gold trade, with the help of customs officials.

In the long run, the Indian diaspora, some 25 million strong, and with an affluent section almost a fifth of this size, will furnish a strong base for a well-ramified international laundering network, driven by a search for quick profits and speculative gains.

Successive Indian governments have pampered this section in a variety of ways

– including by floating the India Development Bonds which offered an attractive rate of interest – with no question asked about the source of funds. This raised $ 5 billion. In 1999, to combat sanctions and embargos imposed after the Pokharan-II nuclear tests, the government floated Resurgent India Bonds along the same lines as the India Development Bonds and raised $ 4.2 billion.

The peculiar characteristics and activities of the Indian diaspora and its numerous connections with the domestic elite need much deeper investigation and discussion. They certainly warrant an exploration of possible remedies to money laundering, founded on policies that emphasise thoughtful but tough capital controls. Such controls, contrary to neoliberal wisdom, do work. Malaysia during the Asian financial crisis of the late 1990s is an outstanding example of such success – unlike Thailand, Indonesia and South Korea, which gave in to pressure and liberalised the capital account thus permitting capital flight on a large scale. Even George Soros, who raided the Malaysian economy, admitted the success of Malaysia’s capital controls.

Money Laundering Laws

The book is also strong on its discussion of various money laundering laws across the globe, and in particular, its critique of the Indian act finally passed in 2005. The act’s passage was delayed by about seven years because it was wrongly sought to be linked to the transition from the Foreign Exchange Regulation Act to the Foreign Exchange Management Act.

The act is riddled with flaws, including a poorly designed schedule of offences, and a deeply problematic procedure: search, seizure and attachment can only be carried out by the money laundering authority after the relevant charges have been filed in a court of law. As the author says: this provision “shows ignorance of the investigatory process. It is only through searches and seizures (whether carried out suo motu or during the process of arrest and attachment) that material is built up as evidence to file charges; without sufficient back-up material no charges can be filed.”

One major amendment to the Money Laundering Bill, which delayed its passage, rendered money laundering a “noncognisable” offence, and whittled down the seriousness of the crime. The same amendment, however, filled a major lacuna by defining the “investigating” agency under the act. Nevertheless, many other flaws remain. The act sets a monetary limit to define an offence (Rs 30 lakh). But businessmen are adept as techniques such as “smurfing” – i e, breaking up transactions so that each is less than the reporting requirement and escapes the definition of offence.

Basically, the Money Laundering Act follows the same “soft-on-business” paradigm as FEMA and is just as lax and potentially ineffectual. Just as in the past, its implementation is likely to be undermined by a lack of coordination between different agencies: the enforcement department, the Reserve Bank, central bureau of investigation, etc.

The tortuous progress of the money laundering legislation shows that the Indian government lacks the will to discipline Indian businesses and stop capital flight. It just does not have the stomach to take tough measures. The book brings this to light.

Errors of Omission

While valuable and original, the book is marked by some absences and errors of omission. It does not even discuss private banking, the most important “legal” and “respectable” method of soliciting, investing, parking and managing ill-gotten wealth. Private banking is a big business. It specifically targets “high net-worth individuals”, or the extremely wealthy, all over the world. Crucial to it is the assurance of complete secrecy. As Srinivasan says “in London, for instance, the Bank of America private bank is located in the mansion that Charles I gave Nell Gwynn, but is unlisted in the London telephone directory, and unknown to most officers of Bank of America London”.

Two other elisions deserve mention: the routes typically taken by “round-tripping”, to which countries like Mauritius are pivotal; and the arms trade, with its enormous commissions and kickbacks. The first issue is clearly important for India. Mauritius has been the source of the highest or second-highest flow of foreign investment into India for more than a decade. Evidently, these funds come from somewhere other than that country’s tiny, sugar-based, economy. All Indian governments have turned a blind eye to this: so long as the money keeps coming, no questions should be asked.

The armaments trade is a major issue too. India has emerged as one of the top three buyers of lethal weaponry in the world, with purchases of the order of $ 5 billion last year (it is also trying to sell weapons to other third world countries). India’s arms purchase bill is reportedly likely to be as high as $ 95 billion spread over the next 15 years.

It is rare for any large arms deal in the world to go through without kickbacks, which are then laundered. Recently, Rear Admiral Suhas Purohit, former deputy chief of Naval Logistics, investigated overinvoicing and money laundering in Indian naval purchases during the 1990s from Russia and the former Commonwealth of Independent States. There was a substantial difference between the prices paid for these when they were routed through shady arms dealers and agents, and the prices quoted to Indian logistics delegations visiting Russia or the Ukraine.

Defence purchases have long ceased being a holy cow as far as the Indian public is concerned. The Bofors scandal was a turning point. The “coffin” scam during the 1999 Kargil war took the process one step further. Today, there must be an even more critical and clinical discussion of the links between billion-dollar arms deals and money laundering.



Economic and Political Weekly

available from:

Churchgate Book Stall

Churchgate Station Opp Indian Merchants Chamber Churchgate Mumbai - 400 020

Economic and Political Weekly January 28, 2006

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here

Back to Top