Citizens' Issues
Grey areas impacting prevention of money laundering in India

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.)

 

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COMMENTS

keshav gupta

4 years ago

In our country there is no political will to stop black money.
Ordinary citizen who is having monthly income around 10000/- why will need Rs.500/1000/- currency note for payments.
Rs.500/1000/- note is only for settlement of transactions of illegal nature.
Make all deals/transactions with cash receipt/payments above Rs.10000/- as illegal.

REPLY

nagesh kini

In Reply to keshav gupta 4 years ago

ATMs dispense Rs.500 notes that need to be exchanged by a physical visit to bank branches.
In Mumbai the BEST conductors do not accept Rs. 500 notes.
Notes above Rs.500 need to be demonetised.

nagesh kini

4 years ago

KYC (Kick/Kill)Instead of Know your customer formalities are observed more in breach. How many bank branches have actually visited the residence to establish that the address is where s/he resides? Some private banks called on potenrtial at his/her with a photographer in tow. The Officer should affirm the home visit.
Yes the cash withdrawal limit has to be brought down to Rs.10,000 to be in line with the USA and Australia.
Each customer should be provided with a master ID for effective customer data integration,this needs to be verified at all branches where s/he opens new accounts to ensure PMLA compliance and Risk assessment.

NSriramamurty

4 years ago

In this week,in AP Cuddapah Police Changed a Car for a long Distance and Stopped. They Found Rs.30 lakhs Cash of Rs.500/1000 Notes.The owner said he took it Cuddapah to pay for a Land deal and it could not be struck and hence Bringing Back. As Correctly told by Author all property deals,including Bureucrates and Politicians, are done some Percentage Money Paying in cash, which is Black Money in Circulation.As there is no Co-ordination and Digital Reporting in all departments- No body can track and Interlink all such transactions.Surveys show that Registration Departments are highly Corrupt.As Cobrapost exposed, all Banks easily help all Illegal Transactions.

Watch out for those bright colours in your food; they are banned

Indian sweet makers go overboard with artificial colouring. Rhodamine B, followed by Orange II and Metanil Yellow, were the two most common non-permitted or banned colours that were used, according to a study by Sumita Dixit

 
A study, conducted on milk-based sweets consumed in India showed that nearly 60% of food colours used in Indian sweets are well above legal limits and as much as 16.4% are non-permitted colours.
 
A study by Sumita Dixit—a researcher at the Indian Institute of Toxicology Research, Food, Drug and Chemical Toxicology Research Area (IITR)—published by the Journal of Food Science has come to the startling conclusion that Indian sweet makers go overboard with artificial colouring. While this is evident in the pink and green sweets, yellow and orange jelebis that we consumer with relish, there is not a scientific study that establishes the danger. Ms Dixit's study analyzed 2,409 samples of milk-based sweets, cereal-based sweets and savoury products. Of this sample, 83.6% contained permitted colours, but 58% of these were over the maximum allowable concentration limit of 100 mg/kg and the remaining 16.4% contained dangerous non-permitted colours. This has bought the total number of adulterated products in India to 64.8%.
 
The study showed that Rhodamine B, followed by Orange II and Metanil Yellow, were the two most common non-permitted or banned colours that were used. It is important to note that Rhodamine B is a cancer causing colouring agent that gives a pink colour but is actually meant for use in the plastics and textile industry. It gives a pink colour to sweets and is also used by shrimp paste makers to give it a fresh it a reddish brown hue. In many countries the use of Rhodamine B has been banned for 50 years and attracts a jail term, if used. Metanil yellow, which is widely used, is also banned and a study on rats showed that it affects the brain. 
 
Another research was conducted to assess how often Indian consumers ate colour-containing products at a national level. The study found that children and adolescents had higher average daily consumption of such foods than adults, potentially posing a health risk. The researchers said, “On the basis of average consumption of food commodities and average levels of detected colours, the intake of Sunset Yellow FCF saturates the acceptable daily intake limit to a maximum of 47.8% in children, which is a cause of concern”. Sunset Yellow has previously been linked to hyperactivity in children and Tartrazine, a lemon yellow colour, was the most common permitted colour. An earlier study found ADI limits were exceeded in 36% of food use in India.
 
The Food Safety and Standards Authority of India permits eight synthetic colours in specified foods at a uniform level of 100 mg/kg, while the acceptable daily intake ADI for food colours varies from 0.1 to 25 mg/kg body weight per day. The researchers said that these rules needed to be reviewed. The rule relating to the uniform maximum permissible limit of synthetic colours should be governed by technological necessity and the consumption profiles of the food commodities, in order to prevent people from unnecessarily getting exposed to excessive amounts of synthetic colours which can risk their health. Also the saturation of ADI limits in the commodities which is up to 48% is a cause of concern.
 

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Lupin Q4 net profit jumps 162% on robust sales in India, US

Nomura has reiterated a buy on the pharmaceutical company due to increased sales from India and US, as well as robust pipeline of ANDA pipeline that could boost Lupin’s future prospects

Lupin has reported exemplary quarterly results, with 34.7% increase in consolidated net sales for the quarter ended March 2013 at Rs253.74 crore compared to the Rs188.32 crore for the corresponding quarter last year. The pharmaceutical company’s net profits profit grew by 162.2% year-on-year (y-o-y) to Rs40.81 crore during Q4 FY 2012‐13 up from Rs15.56 crore for the same period last year.
 

According to Nomura, the good results were driven positive showing from the United States. The strong showing in India surprised too. “The growth in India at 43% y-o-y surprised us positively and strong performance in the US was in line with our expectations. We remain positive given potential of earnings upgrades driven largely by the US opportunities,” said Nomura in their quick note. Nomura, in their quick note to clients, has pegged the stock as a ‘buy’ and fixed a target price of Rs790.
 

Earlier, Moneylife had recommended Lupin as part of its ‘Long-Term’ portfolio at Rs629. Currently, the stock is quoting at Rs725.45 on the Bombay Stock Exchange (BSE).
 

According to Moneylife database, its return on networth and return on capital employed stood at 34% and 28% respectively. Its strong focus on research and development and a strong ANDA pipeline means investors are expecting premium vis-à-vis potential future returns. The market capitalisation is quoting at 27.88 times operating profit.
 

On a consolidated basis, US and Europe formulation sales (including IP) grew by 49% to Rs12,12.3 crore during Q4 FY 2012‐13, as against Rs8,15.3 crore during Q4 FY 2011‐12, contributing 48% to overall sales. US revenues increased by 33% to$205 million during Q4 FY 2012‐13. Four products were launched in the US market during the quarter taking it to a total of 10 products during FY 2012‐13.
 

The strength in the US was driven by strong pick up in Suprax, Tricor and higher Cefdinir revenues. The company expects to launch 15–20 products in the US, according to Nomura.
 

On the other hand, the India formulations business contributed 22% of the company’s overall revenues for the quarter. The segment grew by 43% recording net revenues of Rs5,65.9 crore during Q4 FY 2012‐13, as compared to Rs3,96.6 crore in Q4 FY 2011‐12.

Furthermore, the Nomura’s note states: “As per management, low base of the last year (on supply constraints) and improving sales force productivity is driving the growth. The company estimates the impact of the new pricing policy could range between 3–3.5% of the domestic sales.”
 

Lupin has filed 8 ANDAs and received 10 approvals from the US FDA during the quarter. During the year, the company filed 21 ANDAs and received 14 approvals. Cumulative ANDA filings with the US FDA as of 31 March 2013 stood at 176 with the company having received 78 approvals to date.
 

Debt Equity Ratio as on 31st March, 2013 was 0.14.

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