TERROR FINANCING : PAVING THE WAYS TO CORPORATE ETHICS IN FINANCING - AN OVERVIEW

Dr. Pranam Dhar Associate Professor, Department of Commerce & Management, West Bengal State University. Email : pranamdharit@yahoo.com Mobile : 9830071587. Website : www.pranamdhar.com Executive Summary
Despite the considerable media attention being given to the financial meltdown there has been little attention on why this happened. This paper investigates into this matter and takes a very unique point of view. Whenever we talk about this matter we thought of liquidity crunch, sub prime crisis, high fiscal and trade deficit etc but we never think about parallel economy and money laundering. Here are some facts regarding this aspect: the amount of money laundered in the whole world is close to $2.85 trillion per year. As per an estimate of International Monetary Fund the aggregate size of this underground and illegitimate market is between 2 to 5 percent of worlds gross domestic product. Criminals become wealthy enough to bribe officials and ensure their continuing profitability. Bribed officials becomes a mere puppet in their hands and act accordingly to their needs. Key media are controlled which prevents any publicity. Terrorist financing, drug trafficking and the black economy are nothing but the pitfalls of this growing menace. This is the biggest industry in the whole world. It is bigger than oil or arms for that matter. Many international money laundering rackets control the whole procedure. In this paper we have presented how parallel economy is affecting various developed and developing countries like U.S.A, U.K, Australia, India, China etc. If you were to conduct a survey in our country asking what is Money Laundering ? The visualization of the Lay man will not be far different than the one shown in this picture. The general guesses from most people would be that it must be something related to drying, washing or may be dry cleaning of the currency notes. This is rather the human tendency about the world's very big crime. To some extent correct but layman don't know much of this world's third largest industry. As per IMF reports the turnover of this industry could be somewhere around $1.5 trillion. However common man does not pay attention because primarily it seems to be a victimless crime. It has none of the issues associated with a vanishing of the money from economy or performance of the government or organizations involved in the same and yet, money laundering can only take place after a predicate crime (such as a Drug trafficking or the stock market frauds) has taken place. If the person on the street is the banker he might throw the three letters "KYC" to express his knowledge. We have also showed that how it is being done and who the main players behind conspiracy are. This paper also prescribes the steps that are needed to be taken by the regulatory bodies to control and regulate this matter. What financial restructuring that are needed to be done. We have also portrayed what are the loopholes that we have in our economy especially in money market and forex market. We have also analyzed and interpreted what are the levels of intensity of anti money laundering laws and what effects they are having in their respective economy. We have suggested in this paper how we can cope with this situation by bringing some technical changes in our financial system, especially when we are talking a lot about corporate ethics in accounting, auditing and finance. Total Word Count : 540 Keywords : Money Laundering, Terrorist Financing, Corporate Ethics, KYC.

TERROR FINANCING : PAVING THE WAYS TO CORPORATE ETHICS IN FINANCING - AN OVERVIEW

1.0. Prelude Todays world economy is global economy and it is not restricted to one place or one country. It is not US economy, UK economy or only Indian economy. Due to globalization one countrys economical conditions affect others. There are several factors that impacts economy of a country export, import, foreign direct investments, parallel economy, ill effect of other related economies etc. It is a trend that an economy grows for several years like 7 to 10 years and then there comes a fall-recession-which stays for a year or two and after that growth begins again. Something in Indian policy making was not right and the country could not react well. An economy is less effected when it is strong from inside but it was not the case for India; existence of parallel economy, black money, fake currency problem, political crisis, high population and high unemployment rate acted as catalysts. In this era of globalization a high volume of illegitimate commercial and financial transactions are going on. Banking and investment institutions of US and European countries are being flooded with this type of illegitimate activities. The amount is trillion of dollars and it is being generated via bonding between distinct but cooperating private sector entities. The existing legal policies and code of action has failed to deal with the situation. These hidden resources possess a major threat to democracy, state security, corporate stability, effectiveness of international aid programmes and economy of a nation. It has not been possible to trace the financial statistics and magnitude of total amount of illegal money. The drug trade has moved hundreds of billion of dollars out of Russia in recent years. Such type of money also finances wars and conflicts between nations. Financial system contains several flaws and given political will, these flaws could be largely corrected1. Estimation shows that India's parallel economy has risen from a mere 3 percent of the GDP in the mid 50s to around 50 percent today. Though the components of parallel economy are many in number, tax evasion, smuggling, bribe-taking, foreign-currency racketeering are some of the most talked about forms. 2.0 Money Laundering Conceptual Aspect If you were to conduct a survey in our country asking what is Money Laundering ? The visualization of the Lay man will not be far different than the one shown in this picture. The general guesses from most people would be that it must be something related to drying, washing or may be dry cleaning of the currency notes. This is rather the human tendency about the world's very big crime. To some extent correct but layman don't know much of this world's third largest industry. As per IMF reports the turnover of this industry could be somewhere around $1.5 trillion. However common man does not pay attention because primarily it seems to be a victimless crime. It has none of the issues associated with a vanishing of the money from economy or performance of the government or organizations involved in the same and yet, money laundering can only take place after a predicate crime (such as a Drug trafficking or the stock market frauds) has taken place. If the person on the street is the banker he might throw the three letters "KYC" to express his knowledge. Money laundering is the process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source.

But in simple terms it is the Conversion of Black money into white money. This takes you back to cleaning the huge piles of cash. Indian newspapers frequently report the money laundering scams perpetrated by the Political leaders and some of the prominent stars are the chief ministers of UP, Punjab and Kerala. UP chief minister ms. Mayawati as per the Indian Express reports used some innovative techniques to launder the money by avoiding the tax in legitimate manner. She accepted the donations from persons who were road side heroes. When CBI raided these guys were found in no position to donate huge sums for political motives. Money laundering is the process by which the illegal origin of wealth is disguised to avoid suspicion of law enforcement authorities and to wipe the trail of incriminating evidence. Terrorists and terrorist organizations though may not be keen to disguise the origin of their money but would be interested in concealing the destination and the purpose for which the money is collected. Therefore terrorists and terrorist organization could also employ techniques to hide and disguise money. Governments around the world recognize the corrosive dangers that unchecked money laundering poses to their economic and political systems and has prescribed acts, rules and regulation for prevention of money laundering. Other Indian star in the laundering Business is Ketan Parekh. It is believed that he shifted the proceeds of money received from the BoI pay order scam to various tax heavens and ultimately in the Swiss Banks. These transactions are believed to be just the tip of the iceberg. If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organized criminal, the insider dealer, the tax evader as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any asset forfeiture laws. Money Laundering is the process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. Thus, we can say Money Laundering' is the introduction of illegally gained assets into the legal financial system with the aim of covering up its true origin. Some estimate annual amounts of laundered money exceed $500 billion in the world. Therefore, we can say that the major objectives of Money Laundering activities are: (a) Concealing the true ownership of illegally-obtained money and (b) Placement, layering and integration of such funds 3.0. What is a Money Laundering Offence ? The offence of Money Laundering may be defined as : Whosoever directly or indirectly attempts to indulge or knowingly is a partly or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of money-laundering. Proceeds of crime means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property. 4.0. History of Money Laundering

The concept of Money Laundering can be traced back to the "Hawala" transactions well known in India for long time now. Hawala mechanism facilitates the conversion of money from black to white. "Hawala" is an Arabic word meaning the transfer of money or information between two persons using a third person. The Hawala mechanism usually does not leave any paper trail and thus is a nightmare for the investigative agencies. The profits generated from Hawala transactions are covertly invested in real estate, films etc. so as to launder them. A few years back it was thought of only petty crime, but with the changed circumstances, especially after terrorist activities after September 11, 2001 attack on World Trade Centre, money laundering is considered as a very serious crime. Worldwide special Acts have been passed to check such activities. The criminals have developed number of methods for the purpose of "Structuring" and "Laundering" currency in the process of converting it from "dirty" to "clean" funds. The major risk to a bank is in the potential for complicity and violation of Acts if such funds are channeled through that Bank. 5.0. Methods of Money Laundering Money laundering often occurs in three steps: first, cash is introduced into the financial system by some means (placement), the second involves carrying out complex financial transactions in order to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration). Some of these steps may be omitted, depending on the circumstances; for example, non-cash proceeds that are already in the financial system would have no need for placement. Money laundering takes several different forms although most methods can be categorized into one of a few types. These include "bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing."

1. Structuring : Often known as "smurfing," it is a method of placement by

which cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts. 2. Bulk cash smuggling : Physically smuggling cash to another jurisdiction, where it will be deposited in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement. 3. Cash-intensive businesses: A business typically involved in receiving cash will use its accounts to deposit both legitimate and criminally derived cash, claiming all of it as legitimate earnings. Often, the business will have no legitimate activity. 4. Over-purchasing : This is where a launderer buys an item from a private seller, pays with an excess check, and is paid back the overflow. This remainder can be claimed as legal spending, and be used however the launderer likes. Ex."I would like to buy your product at Rs.300. However, I would like to pay with a Rs.2000 cheque, and for you to send me back the Rs.1700". 5. Trade-based laundering : Under- or over-valuing invoices in order to disguise the movement of money. 6. Shell companies and trusts : Trusts and shell companies disguise the true owner of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true, beneficial, owner.

7. Bank capture : Money launderers or criminals buy a controlling interest in a

bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny. 8. Casinos : An individual will walk in to a casino or a horse race track with cash and buy chips, play for a while and then cash in his chips, for which he will be issued a cheque. The money launderer will then be able to deposit the cheque into his bank account, and claim it as gambling winnings. If the casino is controlled by organized crime and the money launderer works for them, the launderer will lose the illegally obtained money on purpose in the casino and be paid with other funds by the criminal organization. 9. Real estate : Real estate may be purchased with illegal proceeds, then sold. The proceeds from the sale appear to outsiders to be legitimate income. Alternatively, the price of the property is manipulated; the seller will agree to a contract that under-represents the value of the property, and will receive criminal proceeds to make up the difference. 10. Black salaries : Companies might have unregistered employees without a written contract who are given cash salaries. Black cash might be used to pay them. 6.0. Enforcement against Money Laundering Anti-money laundering (AML) is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent detect and report money laundering activities. Antimoney laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force (FATF) and the promulgation of an international framework of anti-money laundering standards. These standards began to have more relevance in 2000 and 2001 after FATF began a process to publicly identify countries that were deficient in their anti-money laundering laws and international cooperation, a process colloquially known as "name and shame." An effective AML program requires a jurisdiction to have criminalized money laundering, given the relevant regulators and police the powers and tools to investigate; be able to share information with other countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities. 6.1. Criminalizing money laundering The elements of the crime of money laundering are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. It is knowingly engaging in a financial transaction with the proceeds of a crime for the purpose of concealing or disguising the illicit origin of the property. 6.2. The role of financial institutions Today, most financial institutions globally, and many non-financial institutions, are required to identify and report transactions of a suspicious nature to the financial intelligence unit in the respective country. For example, a bank must verify a customer's identity and, if necessary, monitor transactions for suspicious activity. This is often termed as KYC "know your customer." This means, to begin with, knowing the identity of the customers, and further, understanding the kinds of transactions in which the customer is likely to engage. By knowing one's customers,

financial institutions will often be able to identify unusual or suspicious behavior, termed anomalies, which may be an indication of money laundering. Bank employees, such as tellers and customer account representatives, are trained in anti-money laundering and are instructed to report activities that they deem suspicious. Additionally, anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies would include any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may be also flagged as suspicious. For example, structuring can lead to flagged transactions. The software will also flag names that have been placed on government "blacklists" and transactions involving countries that are thought to be hostile to the host nation. Once the software has mined data and flagged suspect transactions, it alerts bank management, who must then determine whether to file a report with the government. 6.3. Value of enforcement costs and associated privacy concerns The financial services industry has become more vocal about the rising costs of antimoney laundering regulation, and the limited benefits that they claim it appears to bring. One commentator wrote that "without facts, [anti-money laundering] legislation has been driven on rhetoric, driving by ill-guided activism responding to the need to be "seen to be doing something" rather than by an objective understanding of its impact on predicate crime. The social panic approach is justified by the language used we talk of the battle against terrorism or the war on drugs..." The Economist newspaper has become increasingly vocal in its criticism of such regulation; particularly with reference to countering terrorist financing, referring to it as a "costly failure," although concedes that the rules to combat money laundering are more effective. However, no precise measurement of the costs of regulation balanced against the harms associated with money laundering, and, given the evaluation problems involved in assessing such an issue, it is unlikely the effectiveness of terror finance and money laundering laws could be determined with any degree of accuracy. Government-linked economists have noted the significant negative effects of money laundering on economic development, including undermining domestic capital formation, depressing growth, and diverting capital away from development. Data privacy has also been raised as a concern. A European Union working party, for example, has announced a list of 44 recommendations to better harmonize, and if necessary pare back, the money laundering laws of EU member states to comply with fundamental privacy rights. In the United States, groups such as the American Civil Liberties Union have expressed concern that money laundering rules require banks to report on their own customers, essentially conscripting private businesses "into agents of the surveillance state." In any event, many countries are obligated by various international instruments and standards, such as the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the Convention against Transnational Organized Crime, and the United Nations Convention against Corruption, and the recommendations of the Financial Action Task Force on Money Laundering to enact and enforce money laundering laws in an effort to stop narcotics trafficking, international organized crime, and corruption. Other countries, such as Mexico, which

are faced with significant crime problems, believe that anti-money laundering controls could help curb the underlying crime issue.

7.0. Money Laundering, Global Recession and Parallel Economy Carlos M. Asilis and V. Hugo Juan-Ramon of International Monetary Fund presented a paper on Corruption and Capital Accumulation. They showed in their infinite horizon continuous time model that in competitive economy with capital accumulation, corruption emerges endogenously. Agents can be of four types firms, government, bureaucratic (consumers/investors/bribe taking agent) and non bureaucrats (customers and investors). The sum of the mass of bureaucrats and non bureaucrats is normalized to one for every time period. This model illustrates the level and the cost of corruption. This model also finds tat economic cost of production is higher in developing countries than developed countries. 7.1. Recession 2008-2009 Timeline July 1, 2008: DENMARK----> Aug. 13: ESTONIA ----> Sept. 8: LATVIA----> Sept 25: IRELAND----> Sept 26: NEW ZEALAND ----> Oct 10: SINGAPORE ---->Nov 13: GERMANY --->Nov 14: ITALY, HONG KONG, and the EURO ZONE ----> Nov 17: JAPAN ---->NOV 28: SWEDEN ---->DEC 1: UNITED STATES ----> Jan 21: India 7.2. Parallel Economy and Recession Parallel economy often could be demonstrated as hidden economy of a country. People or business entities when do not show their exact income as per government rules the income comes under parallel economy. According to Feige when economic activities goes unreported or not measured by societies current techniques to monitor economic activity it falls under parallel or hidden economy5. Parallel economy exists due to various reasons and they are as follows : High tax rate implemented by government Complicated tax paying procedures and policies People believe that their money is not going to be properly utilized by government as their trust on government is less. High inflation which put tax players under high tax paying brackets. People dont get enough return from their paid taxes In case of underground economies of US, UK and Germany, people in order to get government benefits tries to indulge in social security frauds. When parallel economy exists government does not get the actual amount it should get from the tax payers and the actual GDP falls and it will increase fiscal deposit of the country. World View In case of India according to news reported in Financial Express4 estimation of black money, unrecorded and untaxed, circulating in the economy has varied widely from time to time. In 1967-68, it was placed at Rs 3,034 crore. But by 1978-79, it had soared to Rs 46,867 crores more than 15 times in just 12 years. Black money was estimated to be 9.5% of GDP in 1967-68, rising to 49% of GDP in 1978-79 and 50.7% in 1987-88. This is an alarming rise. By the early 1980s, the problem was virtually blaring bright red danger signals. By one count, the rate of growth in the parallel economy was higher than that of GDP in the period from 1980-81 to 1987-89; the

former rose by 46.7% and the latter by 40%. Transparency International, which publishes a Corruption Perception Index, covering 146 countries, places India at rank 91. Some Rs 21,000 crore annually is estimated to exchange hands in the form of bribery in the country, which indicates the extent of the problem. For example, the real estate sector, high taxes result in widespread cash transactions and underdeclaration of deals, which skews market information and hurts the process of capital allocation. The existence of black money is injurious not just for tax revenues. It distorts the systematic resource allocation process and upsets the accuracy of economic forecasts. Good economic management requires precise and reliable data. Industry, meanwhile, needs a business environment that is free of arbitrary controls that may squeeze out bribes. Estimates of Parallel Economy in Developing Countries Period Country Percentage of GDP consisting of parallel economy Nigeria and Egypt 68-76 Tunisia and Morocco 39-45 Guatemala, Mexico, Peru and Panama 40-60 Chile, Costa Rica, Venezuela, Brazil, Paraguay 25-35 Thailand 70 Philippines, Sri Lanka, Malaysia and South 38-50 Korea Hong Kong and Singapore 13 Sweden, Norway, Denmark, Ireland, France, 13-23 The Netherlands, Germany and Great Britain Japan, USA, Austria and Switzerland 8-10 (Source:http://www.crisil.com) India is similarly hit by parallel economy for a long time. People not ready to pay their taxes, tries to escape from taxes by every way possible. Big business, service holders everyone always try to pay lower taxes and eventually nothing at all. Think about a school teacher who tries to go home early, not giving enough potential in the school because he knows when he will reach home a huge number of students will be waiting for private coaching. Doctors skip hospital hours and go for private practicing as for these they do not have to pay taxes. Hidden economy also includes bribing, black marketing, fake currency etc. Economic policies have to go through major consequences as a result of the existence of a parallel economy. As this activity is unrecorded, the official national income accounts statistics do not accurately represent the true state of a nations economy. Given that these statistics are used to generate economic policies and thus act as an essential guide to policy, if the guide is significantly in error, so also might the policy. Fiege has described this phenomenon as the unobserved income hypothesis (UIH) and suggests that systematic biases, unwittingly introduced into the official data have fundamentally distorted our perception of economic realities. A distorted information system leads rational individuals and well intended policy makers to undertake actions that transform initial statistical illusions into real economic maladies. Corruption Perception Index published by Transparency International, covering 146 countries, places India at rank 91. It has been estimated that about Rs 21,000 crore annually exchange hands in the form of bribery in the country. This shows the problem which deep down into peoples morality of the country. Tax rate of the country in moderate, government does not provide so many benefits like developed countries as US, UK but still people are not willing to pay taxes. Big business houses who earn a lot of profit try to escape taxes and contribution to national income by any means possible.

8.0. Preamble of Money Laundering Money laundering is an illegal practice which engages in specific financial transactions, in order to conceal the identity, source and estination of money. After the attack on the World Trade Center in the US, the world has started giving attention on the entire concept of money laundering and recognized how deadly it can be to this world. As per an estimate of the International monetary fund (IMF) the aggregate size of this underground market is somewhere between two to five percent of the worlds gross domestic product. The aggregate money laundered in the whole world could be approximately $800 billion to $2 trillion each year. Mexicans both working illegality and legally staying in America sent an estimated $28.1 billion to relatives in Mexico alone. Money sent home to countries in Latin America and the Caribbean represents 70% of the worlds total amount of remittances. 8.1. How It Happens The basic concept of money laundering originated in U.S. It basically consists of three steps i.e. placement, layering and integration. Placement means physical disposal of cash derived from unlawful activity. Layering refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions. Integration means re-injection of money after it has been laundered in a way that it looks as if it is proceeds from normal business activities. The Hawala mechanism is another way of laundering money. At first they find a bank in a foreign country which is lenient in their banking laws and they strike some deals with the bank to obtain some property. After that the funds are converted into white money and then they are retained where they actually belong to. For money laundering there are some strict rules in U.S and U.K. There is no lower limit concerning what would be the criteria for reporting an illegal or suspicious transaction. In these countries money laundering is not basically concerning money alone it could involve moveable and immoveable assets or properties. 8.2. Money Laundering in India and Asia In India, money laundering is basically involved in terrorist activities and drug trafficking. The effect of money laundering in India is really magnanimous. According to KPMG study money laundered in India consists of 2% to 3 % of our GDP. The culprits ensure that the money does not reach any financial institution by using underground banking which does not need any papers. People deposit money here and obtain a chit or a seal. By submitting these papers money is remitted to the concerned person. Black money in India is estimated to be around 40% of the GDP. We have seen that how Ketan Parekh and many politicians have used this methodology to launder money. Top seven money laundering in corporate sector of India Name of the Person Rs. In Crores Ramalinga Raju 8000 Harshad Mehta 4000 Ketan Parekh 1250 C R Bhansali 1200 Dinesh Dalmia 595 Abdul Karim Telgi 171 (Source: http://www.drishtikone.com) These transactions are really just the tip of the iceberg. Casinos, payment gateways like Western Union, MasterCard or even credit or debit cards are being used extensively for this purpose. Moreover after 1991 the risk of money laundering in India has increased manifold because money can now be laundered via banks and

other financial institutions. Union revenue department discovered 900 bank accounts, which consists of Rs. 1000 crore being operated with fabricating names of companies and persons. A recent study by Interpol showed two types of alternative remittance systems; grouping hawala/hundi banking and the chithi/chop shop system. Both these systems are based on trust and communities of the whole world are part of it; network system prevailing in China, Southeast Asia and North America and the larger hawala system covering the Indian sub continent. China uncovered 89 cases of money laundering involving a total of 28.8 billion yuan ($4.17 billion) last year, the People's Bank of China said. A total of 350 financial institutions in 2007 were punished for violations of antimony laundering rules and regulations, including 341 banks, four securities and futures firms, and five insurers. Meanwhile, the police and the central bank launched more than 50 campaigns to clamp down on 43 underground banks and detained 180 suspects."The year 2007 marked the establishment of China's anti-money laundering system," said Su Ning, vice-governor of the central bank.

Basic sequence of alternative remittance Source: http://www.interpol.int/public/FinancialCrime/MoneyLaundering/EthnicMoney As in Russia and Mexico, the Thai crisis, which triggered the Asian crisis of 1997, is no stranger to money laundering. According to a study published in 1997 by three researchers at Ulalongkorn University, discovered that equivalent of 8 to 11% of the Thai GDP was controlled, by organized crime, which derived its profits mostly from gambling and prostitution, and also from drug traffic out of Burma.

Top ten Origins of laundered money Origin Amount ($Us % of Total mill/yr) Laundered Money 1 United States 1320228 46.3% 2 Italy 150054 5.3% 3 Russia 147187 5.2% 4 China 131360 4.6% 5 Germany 128266 4.5% 6 France 124748 4.4% 7 Romania 115585 4.1% 8 Canada 82374 2.9% 9 United Kingdom 68740 2.4% 10 Hong Kong 62856 2.2% (Source: www.johnwalkercrimetrendsanalysis.com.au/ML%20method.htm) Rank

Top five destinations of laundered money Destination Amount ($US mill/yr) 1 United States 538145 2 Cayman Islands 138329 3 Russia 120493 4 Italy 105688 5 China 94726 (Source: www.johnwalkercrimetrendsanalysis.com.au) Rank

% of Total 18.9% 4.9% 4.2% 3.7% 3.3%

Attractiveness of money launders for some important nations The higher the score the higher the attractiveness Country Score USA 634 United Kingdom 439 Japan 200-249 Canada 250-299 India 0-9 (Source: www.johnwalkercrimetrendsanalysis.com.au) Top ten flows of money laundering Ran Origin Destination Amount ($US mill/yr) k 1 United States United States 528091 2 United States Cayman Islands 129755 3 Russia Russia 118927 4 Italy Italy 94834 5 China China 94579 6 Romania Romania 87845 7 United States Canada 63087 8 United States Bahamas 61378 9 France France 57883 10 Italy Vatican City 55056 (Source: www.johnwalkercrimetrendsanalysis.com.au)

% of Total 18.5% 4.6% 4.2% 3.3% 3.3% 3.1% 2.2% 2.2% 2.0% 1.9%

From the analysis of the Corruption Perception Index, it could be seen that Singapore, Japan, Canada , New Zealand, USA, UK with higher intensity of regulation and at the same time higher rate of parallel economy and its all because of the known factors like high value of their currency, immigration rate etc. But in India where the currency value is less, less number of immigration and with strict laws to abide the rate of parallel economy is much under control. But this could be a signal of utopia because there is lack of proper data availability and accuracy. Data manipulation is at its highest. Thats why if we compared to other countries India is the only country where the regulation intensity is more than the percentage of parallel economy. Further, we can see that United States has the highest Amount in terms of money laundering. It is no surprise because it is from there that a huge amount of money is transferred illegally to Carrabin and Latino nations especially Mexico. That is why recession has a worst effect in the U.S. There are many reasons behind the huge amount that has been laundered from USA. Firstly we all know that dollar has a prestigious value in world wide economy, secondly the exchange rate of dollar is very high when compared with other currencies. Same for the United Kingdom because of their pound value and immigrants from different countries tries to send money at home via Hundi service. If we analyze closely most of the countries are from the EU and the major reason behind is appreciation of euro during the last five years. Though there are strict rules regarding this matter in these developed countries but still huge amount of illegal money has been transferred from these countries in order to gain more benefits in terms of money value. Another effect that money laundering has is its effects on GDP. Because of the black market, a countrys actual GDP is far less than the projected GDP. So after analyzing we can clearly state that there is a connection between the recessionary state in these countries and money laundering. 9.0. Organizations working against money laundering Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. The FATF Secretariat is housed at the headquarters of the OECD in Paris. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body, which brings together legal, financial and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. Currently, its membership consists of 34 countries and territories and two regional organizations. In addition, FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits full participation in plenary sessions and working groups. FATF has developed 40 Recommendations on money laundering and 9 Special Recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions. FATFs three primary functions with regard to money laundering are: Monitoring members progress in implementing anti-money laundering measures. Reviewing and reporting on laundering trends, techniques and countermeasures.

 Promoting the adoption and implementation of FATF anti-money laundering standards globally. The FATF currently comprises 34 member jurisdictions and 2 regional organizations, representing most major financial centres in all parts of the globe: The 40 Recommendations provide a complete set of counter-measures against money laundering (ML)covering the criminal justice system and law enforcement, the financial system and its regulation, and international co-operation. They have been recognised, endorsed, or adopted by many international bodies. The Recommendations are neither complex nor difficult, nor do they compromise the freedom to engage in legitimate transactions or threaten economic development. They set out the principles for action and allow countries a measure of flexibility in implementing these principles according to their particular circumstances and constitutional frameworks. Though not a binding international convention, many countries in the world have made a political commitment to combat money laundering by implementing the 40 Recommendations. Initially developed in 1990, the Recommendations were revised for the first time in 1996 to take into account changes in money laundering trends and to anticipate potential future threats. More recently, the FATF has completed a thorough review and update of the 40 Recommendations (2003). The FATF has also elaborated various Interpretative Notes which are designed to clarify the application of specific Recommendations and to provide additional guidance. A. Legal Systems B. Measures to be taken by Financial Institutions and Non-Financial Businesses and Professions to prevent Money Laundering and Terrorist Financing C. Institutional and other measures necessary in systems for combating Money Laundering and Terrorist Financing D. International Co-operation. 10.0. Steps taken so far by GOI to Prevent Money Laundering In India, The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and t records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished. It is handled by the Indian Income Tax Department. The provisions of the Act are frequently reviewed and various amendments have been passed from time to time. The recent activity in money laundering in India is through political parties, corporate companies and share market. It is investigated by the Indian Income Tax Department.

As per the provisions of the Act, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non banking financial company) and intermediary (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992) shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules under the PMLA. Such transactions include: All cash transactions of the value of more than Rs 10 lacs or its equivalent in foreign currency. All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakhs or its equivalent in foreign currency where such series of transactions take place within one calendar month. All suspicious transactions whether or not made in cash and including, interalia, credits or debits into from any non monetary account such as dmat account, security account maintained by the registered intermediary. It may, however, be clarified that for the purpose of suspicious transactions reporting, apart from transactions integrally connected, transactions remotely connected or related should also be considered. Bank accountant must record all the transactions whose amount will be more than Rs. 10 Lakhs. Bank accountant must maintain these records for 10 years. Banks will also make cash transaction report (CTR) and Suspicious transactions report whose amount is more than RS.10 Lakhs within 7 days of doubt. This report will be submitted to enforcement directorate and income tax department. Rule 8 of Notification No. 9/2005 dated 1-7-2005 require the Principal Officer of a banking company to furnish the information of the cash transactions of a month to Director, FIU-IND by the 15th day (Substituted for the 7th day by Notification No. 15/2005 dated 13-12-2005) of the succeeding month. Cash Transaction Reports can be filed either in manual or electronic format. However, a reporting agency must submit all reports to FIU-IND in electronic format if it has the technical capability to do so. The required technical capability is defined as follows: i) A personal computer with 32 MB memory RAM, 800 x 600 VGA video display, Windows 98/Me/NT/2000/XP; and ii) An Internet connection. 10.0. Public Reactions against Money Laundering 1:Behind every successful businessman there is a trail of political complicity and black money. Each national level political party spends close to INRs 150 Billion in a general election. And the money comes from and goes to unaccounted places. Who wants to control it anyway? Posted by: R K Vajpeyi - 07th Jul 2008 2:FM introduced BCCT( Banking Cash Transaction Tax) to curb such money laundering activities. He observed that contrary to popular beliefs ill gotten wealth is being routed through normal banking channels. PN is another route of money laundering which was still subjected to be further controls by SEBI and RBI because it is through this route; an unknown entity/individual/firm from a tax haven invests in Indian Stock markets, makes a killing and flies around. Again our learned FM stood his ground stating such a measure will send panic signals and our so called FDI will dry out. when it is known that 70% of such FDI is from firms/registered in Mauritius

which is not a rich country by any standards, what further proof is needed that ill gotten wealth is allowed to be legalized through a perfectly legal channel ? What meaning the various legislations have when the Government actively connives at such large scale money laundering ? 11.0. Actions taken so far Against Money Laundering in India "14 bank accounts of Moshin Ismail Chowdhary (involved in terrorist activities) in the Ratnakar Bank, Nana Peth branch, Pune, two bank accounts held by S S Brig Ningthoujam Rajen Singh, Commander-in-Chief and Finance Secretary of Kanglei Yawol Kanna Lup in the ICICI Bank, Guwahati and two bank accounts held by Rajen Singh's associate in SBI, Kurseong" have been frozen," Home Minister P Chidambaram told reporters1. Meanwhile, Rs 22.25 crore was released by the Home Ministry for the families of 416 slain central para-military forces personnel as a grant-in-aid for payment of compensation, he said. Chidambaram said the government also sanctioned procurement of 801 assault rifles for the NSG at a cost of Rs 20.68 crore. He also said Andhra Pradesh government has issued a notification for acquisition of land for the NSG regional centre at Hyderabad. The Home Minister said a CCTV system was approved for 29 markets and check posts in the national capital and an advance withdrawal of 70 per cent (Rs 47.62 crore) of the total cost was sanctioned on March 17. The government has frozen 18 bank accounts found involved in terror financing under the stringent Unlawful Activities (Prevention) Act. The bank accounts located in Pune, Guwahati and West Bengal have been frozen under section 51A of the UAPA which enables the government to freeze accounts of individuals or terror groups to prevent and cope with terrorist activities. 12.0. Conclusion and Suggestions After carefully studying the parallel economy, money laundering and recession it as been found that all are inter connected and parallel economies have a negative influence on a countries economy because it hinders the actual growth and shows a falls GDP of a country where there is high possibility of existence of fiscal budget. 1. Government financial structure need to be revised in term of forex and money market. 2. Transparent information systems need to be implemented for better communication. 3. Different financial service providers, banks and legislators are doing much to fight against money laundering. We approach a 3K solution for these authorities and these would be i) Know your customer (KYC): financial background of customer helps to reduce any concealed risk.
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ii) Know your transaction (KYT): unusual transact could be identifiable by

daily research. iii) Know your process (KYP): with the help of intelligent clarification formulas and step by step clarification process complete input data could be available. 4. Taxation law should be structured in such a manner that tax evasion becomes impossible. 5. Instead of direct cash transfer, bank transfer should be encouraged. Use of plastic money in UK and other developed countries helped tem a lot to prevent parallel economy and money laundering. So that every transaction in terms of money being recorded and maintained efficiently. 6. We suggest focusing on financial literacy and bringing remittance users into the formal financial sector. 7. Need to impose heavy fines or legal actions to those who commits any criminal offense of this kind. 8. Government should launch some programmes regarding financial literacy which can help under privilege persons to get some knowledge about this racket and the pitfalls they have in their daily lives. 9. The Narcotic Department also needs to be on their toes because we all know that most of the illegal wealth is transferred by smugglers using cocaine and band drugs. 10. Terrorism financing is another omen that as been destroying our economy for the last two decades. So the Research and Analysis Wing (RAW), Intelligence Bureau (IB) and other intelligent agencies need to take adequate actions to prevent terrorism financing. 11. We should focus on reducing the hawala transaction as much as we can by bringing unbanked residence into the financial mainstream. 12. There should be a ceiling of an amount that how much money a person can remit to their home country based on their job or occupation and strict vigilance need to be implemented. 13. Better co-operation should be there between the countries so that they could fight this menace with joint effort. 14. The Government also need to develop separate department which will deal with this matter and can implement new legislations with efficiency. 15. A mechanism of reporting progress need to be established which ensures adequate communication between Law and Finance Ministry. Having said all that there is a need to take a fresh perspective on how to control parallel economy and money laundering. The approach should be to widen the regulatory coverage without imposing to great a compliance burden on the institutions or to great an increase in government expenditure. The focus should be to build a proactive financial structure rather tan a reactive one because after analyzing various countries we have seen in India this menace is still at its infancy. No matter how hard we try to develop our nation and be one of the super powers, this deadly worm will keep on eating its way to our economy making it a hollow one. We should take a leaf out of Mohammad Younis (Nobel Laureate, Bangladesh) book by reaching to poor people and conduct financial literacy programmes to organize these unorganized sectors. The change can occur through our actions and behaviour rather than through the macro level effort of legislation. The problem is not the lack of legislation or standards. We have enough of it. What is lacking is the dearth of values in our behaviour and action. The question is not only of education and experience but the quality of the people their character, value perception and integrity.

A Japanese proverb states The reputation of a thousand years may be determined by the conduct of one hour. The actions of just one person can even change the course of a nation. Finally, we can quote Edward Everett Hale : I am only one But still I am one I cannot do everything But still I can do something And because I cannot do everything I will not refuse to do the something that I can do

References International Policy Report; Dirty Money and Its Global Effects, By Raymond Baker and Brionne Dawson, Research Associate. January 2003. International Monetary Fund, IMF Institute, On Corruption and Capital Accumulation, Prepared by Carlos M. Asilis and V. Hugo Juan-Ramon, July 1994 Reuters UK TIMELINE - World economies slide into recession The Financial Express. The parallel economy in India Posted The parallel economy, its origin size and impact on mainstream economy. (http://www.crisil.com www.dubaided.gov.ae/statistics2006/wcy/Statistics/2.4.13.pdf http://drishtikone.com/?q=blog/indias-top-10-scams http://www.indianmba.com/Faculty_Column/FC177/fc177.html www.johnwalkercrimetrendsanalysis.com.au/ML%20method.htm http://mexidata.info/id964.htm http://www.interpol.int/public/FinancialCrime/MoneyLaundering/EthnicMoney http://www.yourstory.in/resources/legal-talk/1840-money-laundering http://www.helium.com/items/106169-india-the-black-economy

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