Suspected Indian money in foreign bank accounts

By B.Raman

(May 03, Chennai, Sri Lanka Guardian) During the current election campaign, there has been a debate initiated by the Bharatiya Janata Party (BJP) on the action taken or not taken to identify the secret overseas bank accounts of Indian nationals and to bring the money back for use in our development projects. The BJP and the Congress (I) have been accusing each other of inaction in this regard.

The banking secrecy laws of countries such as Switzerland protect the secrecy of only the accounts of individual account-holders. Nations do not enjoy the protection of secrecy. Thus, while the Swiss Federal Government in Berne protects the secrecy of individual accounts, it has been publishing every year since the 1980s the total value of the deposits held in Swiss banks by residents of different countries.

The Government of India became aware of this in the 1980s when a Sindhi nationalist organization of Pakistan got hold of this annual statement, made an analysis of the deposits held by residents in Pakistan and came out with serious allegations against some Pakistani political leaders and military officers. Since then at least till I was in service in 1994, the Government of India was getting a copy of this annual statement giving the total value of the deposits held in Swiss banks by residents in India. The figure, however, did not include the value of the deposits held in Swiss banks by Indians residing abroad. It is my recollection that the total value of the deposits from India used to be much less than that from Pakistan. More money from Pakistan was flowing to secret Swiss bank accounts than from India.

The information that the equivalent of billions of rupees was held by residents in India in secret accounts abroad is, therefore, not a secret. What needed to be found out was the identities of the account holders and the modus operandi by which they were sending the money to the secret accounts. Since the Swiss laws protected individuals unless there was strong evidence that the deposits came from criminal proceeds, successive Governments in New Delhi could not make much progress in identifying these individuals.

In India, the collection of financial intelligence and the use of such intelligence to deal with organised crime groups, money-launderers and holders of secret overseas accounts were essentially handled by the Central Bureau of Investigation (CBI), the Directorate of Revenue Intelligence (DRI), the Enforcement Directorate and the Central Narcotics Control Bureau. There was no mechanism for a co-ordinated assessment of their intelligence, identification of gaps in their coverage and initiation of steps to fill such gaps.

This lacuna was sought to be filled up by P.Chidambaram, when he was the Finance Minister under Deva Gowda and Inder Gujral between 1996 and 1998 and his Revenue Secretary, M.R.Sivaraman, through the setting-up of a re-constituted Economic Intelligence Council chaired by the Finance Minister. During its first meeting on July 22,1997, it was reported to have set up a core group to monitor trends in financial crime and keep the Council informed. The Economic Intelligence Council, which used to act as a Joint Intelligence Committee to analyse and assess economic and financial intelligence and initiate follow-up action on it, used to meet regularly under the chairmanship of Chidambaram and Sivaraman was initiating the required follow-up action.

The Special Task Force for the revamping of the Intelligence Apparatus, under Shri G.C.Saxena, former head of the Research & Analysis Wing (R&AW),which was set up by the Government of the then Prime Minister Atal Behari Vajpayee in 2000, found to its surprise that after Chidambaram and Sivaraman left office in 1998 the EIC and its core group had not met regularly and that many of the senior functionaries of the Government were not even aware of their being set up by Chidambaram. In its report, the Task Force included a separate chapter on economic and financial intelligence and made recommendations for revamping the machinery for the collection, analysis and assessment of the required intelligence.

Since the report of the Task Force has not been declassified and made available to the public, the public is not aware of the state of our financial intelligence set-up in 2000, the recommendations made by the Task Force to improve it and the action taken on them.

The attached annexure gives my observations on the state of financial intelligence in India as extracted from my book titled “Intelligence: Past, Present & Future” published by the Lancer Publishers of New Delhi in 2001. There have been some changes and improvements since then such as India becoming a member of the Financial Action Task Force (FATF) etc.

( The writer is Additional Secretary (retired), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. E-mail: seventyone2@gmail.com )

ANNEXURE

(Extracts from my book titled “Intelligence: Past, Present & Future” published in 2001 by the Lancer Publishers of New Delhi (www.lancerpublishers.com )

In the World Money-Laundering Chart prepared by the Clinton Administration, India was graded as a medium-high priority country, in a sliding scale of six grades ---high, medium high, medium, low medium, low and no priority. Amongst countries graded high were the USA itself, the UK, Germany, Italy, Switzerland, the Cayman Islands, Hong Kong, Singapore and Thailand.

In a report to the Congress on money-laundering in India during 1994, it said: "The Government of India continues to be effective in its effort to reduce currency flows through the underground hawala system, but drug-traffickers, arms smugglers and other criminals continue to use this traditional remittance system to return illicit proceeds to India from all parts of the world, including the US. A new policy on imports has not eliminated the flow of gold into India, a
long-time venue for money-laundering."

It added: " Invoice manipulation is also used to conceal money movements, usually through front companies based in Hong Kong, Singapore or the Middle East. Indian criminals evade their Government's currency restrictions by opening accounts in Nepalese banks and transferring the money into accounts in India or transporting monetary instruments back to India. Some Indian traffickers are also known to have channeled money to Nepal and transferred it to Hong Kong, Singapore and Switzerland. India has criminalised money-laundering and adopted other controls, but, as the foregoing indicates, enforcement is largely ineffective."

However, the final report on the subject for 2000 prepared by the Clinton Administration and released after Mr.Bush Jr assumed office on January 20,2001, said as follows: "The hawala (or hundi) alternative (or parallel) remittance system continues to be a key factor in money laundering and other financial crimes committed in and associated with South Asia. It is closely related to the "black" or "off the books" economies in the region. The size of the underground economies in South Asia are estimated to be 50 to 100 percent the size of the "white" or "documented" economies.

"Hawala operates on trust and connections ("trust" is one of several meanings associated with the word "hawala"). Customers trust hawala "bankers" or "operators" (known as hawaladars) who use their connections to facilitate money movement worldwide. Hawala transfers take place with little, if any, paper trail; and, when records are kept, they are usually kept in code. Contrary to various media reports, hawala is an ancient system; it was the primary money transfer mechanism used in South Asia prior to the introduction of Western banking. Today, hawala continues to be used for many legitimate transfers for cultural and financial reasons; and it also often operates in conjunction with Western banking operations.

"Dubai, India and Pakistan form a "hawala triangle" responsible for significant international money laundering activities that go far beyond South Asia. While interdiction of non-bank money laundering systems, such as hawala, is difficult enough in itself, this difficulty is sometimes compounded by ineffective money laundering countermeasures in Dubai and the other Emirates."

It further added: "Money laundering is a growing concern in India because of its large population and emergence as a regional financial center. The hawala (or hundi) alternative remittance system reportedly is used by criminals to launder money generated from drug trafficking, alien smuggling, corruption, and financial fraud.

"The Narcotic Drugs and Psychotropic Substances Act (NDPSA) of 1985,amended in 1988, calls for the tracing and forfeiture of assets that have been acquired through narcotics trafficking, and prohibits attempts to transfer and conceal those assets. This legislation seems to have the effect of criminalizing drug money laundering. The Code of Criminal Procedure, 1973, Chapter XXXIV (sections 451-459) establishes India's basic framework for confiscating the proceeds of crime. The Criminal Law Amendment Ordinance (CLAO) of 1944 allows for the attachment and forfeiture of money or property obtained through bribery, corruption, criminal breach of trust, or theft, and of assets that are disproportionate to an individual's known sources of income.

"The Indian Parliament continues to consider draft legislation that would explicitly criminalize money laundering, impose reporting requirements on financial institutions and intermediaries, and provide for seizure and confiscation of assets related to the proceeds of crime. The Bill was referred to a select committee of the upper House of India's Parliament, which has made certain recommendations. These are currently under review by the executive branch.

"The GOI does not have a financial intelligence unit (FIU); and legislation currently before the Parliament does not call for the establishment of an FIU. The Central Economic Intelligence Unit (CEIB) is the Government of India's (GOI) lead organization for fighting financial crime. Other organizations such as the Directorate of Revenue Intelligence, Customs and Excise, and the Reserve Bank of India also play a role in the enforcement of India's anti-money laundering laws.

"India is a party to the UN 1988 Drug Convention, and is a member of the Asia/Pacific Group on Money Laundering. The GOI should adopt comprehensive anti-money laundering legislation, and create an FIU that would analyze suspicious transactions reports and cooperate with FIUs from other countries."

While India is not a member of the FATF, it is a member of the Asia/Pacific Group on Money Laundering (APG), which has its own Secretariat. Its objective is to ensure the
adoption, implementation and enforcement of internationally accepted anti-money laundering standards as set out in the recommendations of the FATF. The other members are: Australia, Bangladesh, Chinese Taipei, Fiji Islands, Hong Kong, Japan, Malaysia, New Zealand, Pakistan, Republic of Indonesia, Republic of Korea, Republic of the Philippines, Samoa, Singapore, Sri Lanka, Thailand, USA and Vanuatu.The following attend its meetings as observers: Brunei, Canada, Cook Islands, Macau, China, Nepal, Burma, Vietnam, the ASEAN Secretariat, the Asian Development Bank, the Commonwealth Secretariat, the Egmont Group of Financial Intelligence Units of the World, the FATF Secretariat, the International Development Law Institute, the IMF, the Interpol, the Offshore Group of Banking Supervisors, the South Pacific Forum Secretariat, the UN Office of Drug Control and Crime Prevention, the World Bank and the World Customs Organization.

In March, 2000, the APG started a project for establishing a regional Financial Intelligence Unit, which would initially cover Fiji, Cook Islands, Vanuatu and Samoa. The Cook Islands, Vanuatu and Samoa have already set up their own FIUs. Fiji was in the process of doing so.

In India, the collection of financial intelligence and the use of such intelligence to deal with organised crime groups are essentially handled by the Central Bureau of Investigation (CBI), the Directorate of Revenue Intelligence (DRI), the Enforcement Directorate and the Central Narcotics Control Bureau. There was no mechanism for a co-ordinated assessment of their intelligence, identification of gaps in their coverage and initiation of steps to fill such gaps.

This lacuna was to be filled through the setting-up of a re-constituted Economic Intelligence Council chaired by the Finance Minister. During its first meeting on July 22,1997, it was reported to have set up a core group to monitor trends in financial crime and keep the Council informed.

The fight against money-laundering in India is complicated by the following factors:

• The politician-criminal nexus.

• The lack of effective control over contributions to political parties and election expenses. This enables criminal elements to use their contributions to the political process as a safe channel for money-laundering and for gaining political influence to incapacitate the intelligence and investigating agencies so that they cannot effectively act against them.

• The flourishing Hawala Triangle constituted by India, Pakistan and Dubai. While the search for an entente cordiale between the States of India and Pakistan has proved elusive since 1947, there is an entente cordiale between the criminal worlds of the two countries, interacting with each other either directly or through the intermediary of their counterparts in Dubai. No study in depth has been made of this entente cordiale or, if it has been, the public has not been told of its conclusions.

There is thus a lack of the required political will to deal with this problem in an effective manner by strengthening the capabilities of the intelligence and investigating agencies and letting them function without any political interference. There has also been a lack of interest on the part of our legislators in this subject, which has a vital bearing on our national security, economic well-being and fight against terrorism and Pakistan's proxy war.

Since the NSC Secretariat is designed to function as the nerve-centre overseeing all aspects relating to our national security, it should have an oversight role in respect of the collection, assessment and utilisation of financial intelligence and evaluation of the performance of the agencies responsible for these tasks too.

-Sri Lanka Guardian