The article focuses on a relatively less addressed method of money laundering: Trade-Based Money Laundering (“TBML”). Money launderers have opted for TBML because of two major reasons: (i) the massive boost in the global trade in the past couple of decades, and (ii) because of the increased inspection and detection techniques for other commonly practices money-laundering methods. The write-up will then address this issue as dealt with within the Indian legal system. Lastly, the write-up also discusses a couple of viable solutions to this issue as suggested by the global institutions.
Introduction
According to the International Money Laundering Investigation Bureau (“IMLIB”), money laundering is the third-largest industry in the world, after oil and currency. These figures have attracted national and global attention to devise policies and solutions, however, the complex and dynamic nature of the techniques used by the launderers has made it immensely difficult for the investigation agencies to catch up to them. One such technique is Trade-Based Money Laundering (“TBML”), which hardly has any literature available with countries as to its functioning. This inability of the investigating agencies can be attributed to the flaws and shortcomings in the current law which have been addressed in this write-up, specifically with respect to TBML.
There are three main types of money laundering techniques; one, where there is the movement of value through a financial system using methods such as cheques and wire transfers; second, where there is a physical movement of banknotes using methods such as cash couriers and bulk cash smuggling; third, false documentation and declaration of traded goods and services i.e. TBML.
Trade-Based Money Laundering can be done in a number of ways, often involving alterations being made to the invoice, bill of lading etc. The major ones are as follows –
- Mispricing, where the goods are sold, generally to a subsidiary of the same parent company, at a greater or a lower price than the actual market price prevalent;
- Misrepresentation of volume, where the quantity supplied is not equal to the quantity that has been mentioned in the invoice;
- Issuance of multiple invoices, where multiple invoices are issued for the same shipment and often money launderers have a number of technical explanations for this;
- False description of goods, where the goods supplied are either not what they are claimed to be or the quality of which is much different than what they have been charged for;
- Phantom Shipments, where the goods that have been claimed to have been sold are never shipped.
With the current system of operations and the limited information pool available to the authorities, most of these shipments if not physically inspected, it becomes virtually impossible to know about the discrepancies that exist.
We have a number of reporting entities and certain authorities provided for in our system, which by virtue of the duties assigned to them under the Prevention of Money Laundering Act, 2002 (“Act”), are responsible for carrying out the requisite due diligence and then informing the Director, Financial Intelligence Unit – India (FIU-IND) in cases of suspicious transactions and red flag indicators. Some of these detection agencies are banks, law enforcement agencies, customs authorities, and they are referred to as the Reporting Entities under Section 1 (wa) of the Act. etc.
Banks are involved in providing trade finance to the trading entities and hence play a crucial role in the process. In this regard, banks do perform their part in terms of risk-based activities, which involves meeting various requirements of customer due diligence such as Know Your Customer (“KYC”) (by mandate of law) and Know Your Business (“KYB”) (voluntarily), checking for sanctions and other watch lists etc. However, there is a limit to what the banks can do. Out of the total trade, banks only provide for 20% of the total trade transactions, and the rest 80% transactions are Open Account Transactions over which banks have no real control. Even for the 20%, it is not possible for the banks to inspect the goods and the shipment physically. This might be possible for the Customs Authorities, but they don’t have the complete information about the shipper, buyer and the transaction. Therefore, to the exclusion of the importer and the exporter, nobody really has a complete view of the transaction.
If the banks decide to pull out with trade financing due to this apparent risk that they face to altogether prevent money laundering through these means, then it will severely affect legitimate trade as well and will create ripple effects throughout the market, with the traders inevitably having to shift to other less-regulated means of payments. Hence, even the government has an incentive to encourage trade financing.
Issues with Prevention of Money Laundering Act, 2002
In light of the above information, India’s PMLA might seem that it needs more structuring in order to accommodate for the growing TBML techniques which are strategic and refined in their approach and cannot be traced out with the current resources provided to them.
It is to be appreciated that some notable regulatory changes and guidelines have been issued in recent times impacting TBML. These include:
- The passing of the Undisclosed Foreign Income and Assets (Black Money) and Imposition of Tax Act, 2015 and Benami Transactions (Prohibition) Amendment Act, 2015 to prevent and curb money laundering.
- Clause 177 of the 2015 Finance Bill proposed to club all offences under Section 132 of Customs Act such as false declarations, false documentation, etc. as offences under Prevention of Money-laundering Act (PMLA), 2002.
- Formulation of an elite panel comprising the Enforcement Directorate, Director General (DG) Directorate of Revenue Intelligence (DRI), DG Central Economic Intelligence Bureau (CEIB), Director of Financial Intelligence Unit (FIU) and the Central Board of Direct Taxes (CBDT) investigation wing to devise and solidify indicators (on the classification of certain types of transactions) evaluate and identify red flags, in the case of any misdemeanor.
- The Financial Intelligence Unit (FIU) rolled out a new process mandating all banking and financial institutions to file formatted Cross Border Wire Transfer Reports (CBWTRs) for amounts exceeding INR 5 lakh, under the legal anti-money laundering provisions
- RBI’s advisory to banks to intimate them to exercise caution, with regard to an emerging trend of parties using fake or forged Bills of Entry for foreign remittances, especially to certain tax-havens. The regulator has also initiated database synchronization with the department of customs for fraud detection.
However, even with all these authorities and provisions and amendments and guidelines, due to the lack of interconnectedness, centralized system, and lack of required information with each individual party, there exist some discrepancies which give scope for TBML to be carried out.
Therefore, the issue with the current legal position of India with respect to anti-money laundering laws is that the objectives behind the introduction of PMLA, 2002 are not being achieved as long as a proper system to deal with TBML isn’t formulated. The government while actively dealing with money laundering in terms of cash-based money laundering and money laundering through financial institutions has closed the front door for such activities, however, the back door (i.e. TBML) is still open for the launderers to launder money.
In 2019, the Central Government yet again introduced certain amendments in an attempt to make the existing provisions stricter and better armored to detect suspicious transactions. The main aim was to tighten the gaps around existing provisions of the Act i.e. tightening the gap around only those methods of money laundering that are directly addressed by the existing provisions. Some of these included expanding the term “proceeds of crime”, clarification to S.3 of the Act which gives the extent to which a person may be held liable for the offence of money laundering, and other amendments which in effect are giving wider powers to the Directorate of Enforcement “ED”. Clearly, since the Act does not have provisions that directly address TBML in the first place; even with these amendments, the issue of directly and sufficiently addressing the methods of TDML isn’t resolved.
Suggestions
Now, this issue could be addressed through two approaches, one requiring international co-operation; and the second requiring greater collaboration between private and public entities within a nation.
It had already been argued by the FATF in 2006 for international co-operation and cross-jurisdictional data exchange as regards to export, import, and customs such that the transaction details can be exchanged across various jurisdictions through which the money is passed. However, many jurisdictions due to privacy and confidentiality issues do not permit it. Further, since international cooperation is dependent on two jurisdictions simultaneously agreeing on certain rules and guidelines, it is difficult and will probably require a lot of time as well as negotiations. Perhaps this is why even after all these years such a method has not yet been implemented on a global scale.
The second and more viable alternative for a nation trying to target this issue on its own would be through greater public-private collaboration. In 2017, the Wolfsberg Group, the International Chamber of Commerce (ICC), and the Bankers Association for Finance and Trade (BAFT) suggested laws and regulations requiring greater collaboration between private and public entities within the jurisdiction itself. Collaboration between entities such as banks, shippers, law enforcement agencies, businesses, truckers, airlines, port and customs authorities, etc., contribute their bit of information to a data pool where it would be much easier for the data analysts to analyze the various transactions with respect to the legal and financial documents. Further with such a centralized system, one can have more efficient coordination between the different authorities which can conduct more regulated and definite checks, instead of investigation authorities such as port and customs authorities incidentally coming across fraud shipments or the intelligence units coming across half sets of information and speculating over it. Such a system would also have the benefit of increased transparency. For example, a customs officer would have specific information regarding the invoices, bill of lading, and the underlying transaction and hence knows what he is expected to inspect. With the advent of technology and the use of blockchain, this solution seems highly viable.
Additionally, since the data is being maintained centrally from all sources, a better check can be kept on the different authorities so as to avoid any sort of collusion or corruption activity that might be taking place at the grass-root level. Usually, even if a single employee in the bank or a customs officer at the dock passes a blind eye to a suspect transaction – then it becomes highly improbable to track which shipment was responsible for the laundering given the vast trade that takes place in the country.
About the Author Nishant [2018-23] is pursuing BBA.LLB (Hons) from National Law University, Jodhpur
Criminal Law Research & Review 