India is a heaven for black money and hawala transactions. However, we cannot afford to relax on this front. Need of the hour is to curb instances of money laundering to build a healthy financial system
The skeletons are coming out of the closet. A series of exposés by Cobrapost has made Indian financial institutions look extremely vulnerable to money laundering activities. Small, as well as large financial institutions look deficient in anti-money laundering policies that they are supposed to be strictly implemented and followed. Globally money laundering activities have been rampant. As per one estimate, the amount of money laundered globally in one year is 2%-5% of the global GDP, or $800-$2 trillion. There have been some instances of strict action on cases of money laundering, as well. HSBC was recently fined $1.9 billion for money laundering activity in its Mexico centre of operations.
On the contrary, very few cases of money laundering have been reported in India. This is in spite of the fact that India is a heaven for black money and hawala transactions. However, India cannot afford to relax on this front. The responsibility of adopting global standards of anti money laundering measures has increased ever since India became member of Financial Action Task Force (FATF). FATF has total 34 members. After having acquired a membership of FATF, India needs to follow 49 recommendations of FATF. Sadly, current exposures of Cobrapost show that we have failed to implement these recommendations in practice. Cobrapost revelations bring to the fore the areas that need special attention for the purpose of prevention of money laundering. Some of these are as follows:
Cash Transaction Report (CTR) threshold needs to be reviewed: The Prevention of Money-laundering Act, 2002, and rules there under require every banking company, financial institution and intermediary, to furnish to the FIU-IND (Financial Intelligence Unit-India) information relating to –
• All cash transactions of the value of more than Rs10 lakh or its equivalent in foreign currency;
• All series of cash transactions integrally connected to each other which have been valued below Rs10 lakh or its equivalent in foreign currency where such series of transactions have taken place within a month;
The threshold limit for a cash transaction report in the US is $10,000 and in Australia is A$10,000. In India, this limit should be less while actually it is Rs10 lakh and for series of connected transactions it can be less than Rs10 lakh. Why such a high threshold limit in India? We all know that cash transactions are a preferred mode of moving black money in India. Also, cheque payments are avoided. For example in real estate transactions, black money is involved in a majority of transactions. Considering the spread of cash transactions, all transactions beyond Rs50,000 need to be reported as part of the cash transaction report, with or without suspicion. Just asking for PAN card is not good enough. Why can’t we make payments by cheques?
Customer document collection is not sufficient:
What is surprising is that in India, document collection at the time of account opening in not sufficient. Even essential documents are not collected at the time of account opening in all instances. While banks are supposed to comply with documentation in all cases, a KPMG study in this regard has found 13% accounts were opened without fully collecting or verifying documents, which all of us would agree that is a serious lapse (http://www.kpmg.com/IN/en/IssuesAndInsights/ThoughtLeadership/AML_Survey_2012.pdf
). Even in cases where a document has been properly collected, customer due diligence was not done properly. Documents provided by customers have also been found to be fraudulent, in some cases.
Lack of customer data integration: Many banks have data issues, because of which anti-money laundering becomes easier. For many banks, it is still not possible to integrate and arrive at complete transaction details of a single customer. For instance, if Mr X opens an account in Chennai and opens another account in New Delhi, many banks still cannot identify the money used by this customer across two branches within their own network. This creates space for money laundering in the banking system.
Insufficient automation to handle politically exposed persons: KPMG had done a survey on anti money laundering (AML) in India in 2012. The survey brings out some of the series lacunae in the AML system in the country. For instance, as per FATF guidelines, financial institutions should have appropriate controls and checks to monitor politically exposed persons (PEP). FATF recommendations in this regard say that financial institutions should have:
• Appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person;
• Obtain senior management approval for establishing (or continuing, for existing customers) such business relationships;
• Take reasonable measures to establish the source of wealth and source of funds; and
• Conduct enhanced ongoing monitoring of the business relationship.
However, the result of the survey shows that more than 49% banks and financial institutions do not have automated system for checking PEP in India. This raises questions on the robustness of the AML system in banks.
Integrity Issues: This is probably the biggest challenge to handle. Connivance of employees in money laundering process can be reduced by better training and a strong deterrent like immediate punishment by the bank management. Every suspicious case of money laundering needs to be taken seriously and not wished away by the top management as has been the case during recent times.
With rising incidents of corruption in India, cases of money laundering are bound to rise. Need of the hour is to curb instances of money laundering to build a healthy financial system.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)