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GS Paper: Money-Laundering & Its Prevention

  • Pakistan is out of FATF ‘Grey List’ on terror funding

    Global terror-financing watchdog FATF has announced Pakistan‘s removal from its grey list, saying the country has largely completed its action plans on anti-money laundering and financing of terrorism.

    What is the FATF?

    • FATF is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering.
    • The FATF Secretariat is housed at the OECD headquarters in Paris.
    • It holds three Plenary meetings in the course of each of its 12-month rotating presidencies.
    • As of 2019, FATF consisted of 37 member jurisdictions.

    India’s say in FATF

    • India became an Observer at FATF in 2006. Since then, it had been working towards full-fledged membership.
    • On June 25, 2010, India was taken in as the 34th country member of FATF.

    EAG of FATF

    • The EAG is a regional body comprising nine countries: India, Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan and Belarus.
    • It is an associate member of the FATF.

    What is the role of FATF?

    • The rise of the global economy and international trade has given rise to financial crimes such as money laundering.
    • The FATF makes recommendations for combating financial crime, reviews members’ policies and procedures, and seeks to increase the acceptance of anti-money laundering regulations across the globe.
    • Because money launderers and others alter their techniques to avoid apprehension, the FATF updates its recommendations every few years.

    What is the Black List and the Grey List?

    • Black List: The blacklist, now called the “Call for action” was the common shorthand description for the FATF list of “Non-Cooperative Countries or Territories” (NCCTs).
    • Grey List: Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.

    Consequences of being in the FATF grey list:

    • Economic sanctions from IMF, World Bank, ADB
    • Problem in getting loans from IMF, World Bank, ADB and other countries
    • Reduction in international trade
    • International boycott

    How had it impacted Pakistan economically?

    • A country on the ‘grey list’ is not subject to sanctions.
    • However, the ‘grey list’ signals to the international banking system that there could be enhanced transaction risks from doing business with the said country.
    • In 2018, the Economist noted that there had been no direct economic implications when Pakistan was on the grey list from 2012 to 2015.
    • Instead, Pakistan managed to obtain a $6 billion bailout package from IMF in 2013 and raise additional funding in global debt markets in 2015.

    Pakistan claimed the politicization of FATF. Is that true?

    • In the run-up to the February 2018 decision, the US had weaned Saudi Arabia away, leaving only China and Turkey supporting Pakistan.
    • China eventually withdrew its objection.
    • A few days later, India publicly congratulated China for its election as vice president of FATF, lending credence to the speculation that a deal had been reached behind closed doors.

    How Pakistan managed to get out of the ‘inglorious’ list?

    fatf

    • Removal from the list mark the culmination of a four-year reform process that has required far-reaching changes to Pakistan’s financial system.
    • It appears that, Pakistan has performed well in particular to laws governing money laundering and terrorism financing.
    • Pakistan was given an action plan by FATF in 2018 to address strategic counter-terrorist financing-related deficiencies.

    Conclusion

    • This is not the first time for Pakistan to exit Grey List. It has been swinging on its position on terror financing.
    • Pakistan first figured in a FATF statement after the plenary of February 2008.

     

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  • India gets 4th set of Swiss Bank account details

    swiss

    India has received the fourth set of Swiss Bank account details of its nationals and organizations as part of annual information exchange, under which Switzerland has shared particulars of nearly 34 lakh financial accounts with 101 countries.

    How India gets such information?

    Ans. Automatic Exchange of Information (AEOI) Agreement

    • In an effort to bring in transparency and restrict money laundering, the Swiss Federal Office gives a detailed account of the massive AEOI exchange.
    • This is the fourth tranche of information that India has received from Switzerland since the two countries entered into an Automatic Exchange of Information (AEOI) agreement in January 2018.
    • The first such exchange with India took place in 2019.
    • Some countries which have been added to the Swiss AEOI list for the first time are Turkey, Peru and Nigeria.
    • The Swiss Federal Tax Administration office has also informed that with 74 of these 101 countries, the information exchange was reciprocal.

    What is the volume, nature of data?

    • In 2019, prior to India receiving its first batch of banking information via the AEOI, India would be among 73 countries that would be receiving the data.
    • In India’s case “several dispatches” would be required, giving an indication of the large volume of account holders.

    Guidelines for exchange of such sensitive banking information

    • The guidelines and parameters for the AEOI are set by the OECD (Organisation for Economic Co-operation and Development), the Paris-based international body.
    • The annual exercise of AEOI exchange, such as the current Swiss bonanza of banking details, is strictly meant for “tax only” purposes and in India.
    • This data is kept in the custody of and for action by the Central Board of Direct Taxes (CBDT).
    • Under the OECD’s guidelines, details of the quantum of funds or the names of account holders cannot be publicised.

    What is the scope of India’s AEOI network?

    • Under the OECD umbrella of AEOI, India presently shares bulk financial and banking information with 78 countries.
    • It receives the same from 107 countries, with Switzerland known to be sharing some of the most voluminous data.

    Institutional mechanism in India

    • Primarily to the large volume of FI data coming in from now a 100 countries, the CBDT last year set up a network of Foreign Asset Investigation Units (FAIUs) in 14 of its investigation wings.
    • The information of a region which has reached India via the AEOI route is transmitted in a secure manner.
    • It is the FAIUs that do the follow-up probe of the such data, and to begin with, investigate whether the taxpayer has declared the foreign bank account/s in tax returns or not.

    Why do people park their money in Swiss Banks?

    • As wealth became easily mobile across international borders, the safety and stability of Swiss banks, located in a peaceful country presented an irresistible attraction for the super-rich.
    • Switzerland itself is a politically neutral country.
    • Swiss bank accounts are attractive to depositors because they combine low levels of risk with very high levels of privacy.
    • The Swiss economy is extremely stable, and the banks are run at very high levels of professionalism.
    • Opening an account is not difficult, and requires not much more than basic KYC, including a proof of identity such as a passport.

    Question of Black Money

    • “Black money” allegedly stashed away by Indians in Swiss banks is a political issue in India.
    • Leaders and political functionaries have often made promises to “bring it back” and credit 15 Lakh Rupees in every Indian’s account.
    • Swiss authorities have maintained that they cooperate with the Indian government to fight tax evasion and fraud.

    Also read:

    What are Swiss Banks?

     

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  • Decoding the Crypto Route for Money Laundering

    Money laundering is one of the key charges made by the Enforcement Directorate (ED) against crypto exchange WazirX.

    Also a leader in Maharashtra has made ridiculous claim after ED inquiry that he has made Rs.15 Lakh by investing only Rs.5000 in crypto.

    Are Blockchains traceable?

    • Transactions on a blockchain are always traceable.
    • Most courts and law enforcement bodies around the world have recognized their immutable nature and accept blockchain records as legal proof of transaction histories.
    • However, crypto transactions can sometimes happen “off-chain”, or other methods can be used to obfuscate the flow of funds.
    • Moreover, blockchains are like conveyor belts, which facilitate the flow of crypto from one wallet to another.
    • The identity of the person who holds that wallet has to be ascertained by the wallet service provider and this is often not done to protect user privacy.

    How do they hide transaction trails?

    • One of the most common methods used by hackers and criminals, is called mixing or tumbler.
    • As each crypto token is traceable, tumblers break down multiple tokens from different blockchains and mix them.
    • They then transfer the original amount to the owner, but through multiple transactions and from multiple wallets, obfuscating the trail.
    • Illicit users also transfer traceable tokens to privacy-centric blockchains such as Monero, which hide wallet addresses and particulars.
    • There are also over-the-counter brokers who accept payments in any form, including cash, and transfer the equivalent amount in crypto to a user’s wallet.

    What has ED accused Binance and WazirX of?

    • Among other things, the ED claims that WazirX’s holding company is offering “contradictory and ambiguous answers” about crypto-to-crypto transactions made on WazirX.
    • The ED said WazirX had failed to provide data and show transactions on its blockchain for purchases made by numerous under-investigation fintech firms.

    How do off-chain transactions work?

    • When users withdraw crypto from an exchange, they enter a wallet address and the tokens are transferred, with a record being maintained on the blockchain.
    • However, they also have to pay a gas fee, which is used to pay miners on the blockchain.
    • To avoid this fee, two platforms can integrate with each other and allow users to transfer crypto without using the blockchain.
    • Such transactions can raise questions regarding the tracing of money, as the records aren’t maintained on the blockchain.

    How can exchanges prevent laundering?

    • Exchanges could adopt a resolution on KYC data and maintain transaction logs for eight to 10 years on a blockchain, said industry stakeholders.
    • The use of KYC-compliant wallets could help add a layer of traceability.
    • However, KYC norms for wallets held on platforms outside India can differ from those in India.
    • Some blockchain research firms are also working on machine learning-based tools that can flag illicit accounts.

    Back2Basics: Cryptocurrency

    • Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions.
    • It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments.
    • Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions.
    • When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
    • The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today.
    • Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.

    How does cryptocurrency work?

    • Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
    • Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins.
    • Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
    • If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
    • Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future.
    • Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.

     

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  • Benami Law can’t be applied retrospectively: SC

    The Supreme Court has declared as “unconstitutional and manifestly arbitrary” the amendments introduced to the Benami Property Transactions Act, 1988  in 2016, which apply retrospectively and can send a person to prison for three years even as it empowers the Centre to confiscate “any property” subject to a benami transaction.

    What is Benami Property?

    • Benami in Hindi means without name. So, a property bought by an individual not under his or her name is benami property.
    • It can include property held in the name of spouse or child for which the amount is paid out of known sources of income.
    • A joint property with brother, sister or other relatives for which the amount is paid out of known sources of income also falls under benami property.
    • The transaction involved in the same is called benami transaction.
    • The benami transactions include buying assets of any kind — movable, immovable, tangible, intangible, any right or interest, or legal documents.

    Why do people indulge in such transactions?

    • As a usual practice, to evade taxation, people invest their black money in buying benami property.
    • The real owner of these properties are hard to trace due to fake names and identities.

    What is the Benami Law?

    • The first act against benami properties was passed in 1988 as the Prohibition of Benami Property Transactions Act, 1988.
    • To block all loopholes, the government in July 2016 decided to amend the original act.
    • So after further amendment, Benami Transactions (Prohibition) Amendment Act, 2016 came into force on November 1, 2016.
    • The PBPT Act defines benami transactions, prohibits them and further provides that violation of the PBPT Act is punishable with imprisonment and fine.
    • The PBPT Act prohibits recovery of the property held benami from benamidar by the real owner.
    • Such, properties are liable for confiscation by the Government without payment of compensation.

    What amendment is this article talking about?

    • The 2016 law amended the original Benami Act of 1988, expanding it to 72 Sections from a mere nine.
    • Sections 3(2) and 5 were introduced through the Benami Transactions (Prohibition) Amendment Act, 2016.
    • A Bench, led by CJI N.V. Ramana, declared Sections 3(2) and 5 introduced through this amendment as unconstitutional.

    Which sections did the Supreme Court declare unconstitutional?

    (b) Section 3(2)

    • A/c to this, a person can be sent behind bars for a benami transaction entered into 28 years before the Section even came into existence.
    • CJI Ramana held that the provision violated Article 20(1) of the Constitution.
    • Article 20(1) mandates that no person should be convicted of an offence, which was not in force “at the time of the commission of the act charged as an offence”.

    (b) Section 5

    • It said that “any benami property shall be liable to be confiscated by the Central Government”.
    • The court held that this confiscation provision cannot be applied retrospectively.
    • The CJI dismissed the government’s version that forfeiture, acquisition and confiscation of property under the 2016 Act was not in the nature of prosecution and cannot be restricted under Article 20.

    What else did the apex court observe?

    • The court observed that the 2016 Act condemned not only transactions that were traditionally denominated as benami but also a “new class of fictitious and sham transactions”.
    • The court said the intention of Parliament was to condemn property acquired from ill-gotten wealth.
    • These proceedings cannot be equated as enforcing civil obligations, the CJI noted.

    Why curb benami transactions?

    • Inflationary implications: Rather than hoarding the black money in cash, the tax evader invest their accumulated illegal money in buying benami properties.
    • Loss of economic activity: The whole process affects the revenue generation of government hampering growth and development of the state.
    • Tax evasion: Since the percentage of tax payer in the country is a dismal low, the government fails to successfully implement its policies and schemes due to lack of resources.
    • Money laundering: Benami transactions also serves the illicit purpose of money laundering.

    Conclusion

    • A tough law against benami properties is the need of the hour to check corruption.
    • However, due process of law needs to be followed in true letter and spirit.

     

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  • Centre raises thresholds for prosecution under Customs Act

    The government has raised the thresholds for prosecutions and arrests under the Customs Act to ₹50 lakh from ₹20 lakh for smuggling and illegal imports of goods in baggage, and from ₹1 crore to ₹2 crore for cases involving commercial fraud.

    What is Custom Duty?

    • Customs duty refers to the tax imposed on goods when they are transported across international borders.
    • In simple terms, it is the tax that is levied on import and export of goods.
    • Custom duty in India is defined under the Customs Act, 1962, and all matters related to it fall under the Central Board of Excise & Customs (CBEC).
    • The government uses this duty to raise its revenues, safeguard domestic industries, and regulate movement of goods.
    • The rate of Customs duty varies depending on where the goods were made and what they were made of.

    Types of custom duty

    • Basic Customs Duty (BCD): It is the duty imposed on the value of the goods at a specific rate at a specified rate of ad-valorem basis.
    • Countervailing Duty (CVD): It is imposed by the Central Government when a country is paying the subsidy to the exporters who are exporting goods to India.
    • Additional Customs Duty or Special CVD: It is imposed to bring imports on an equal track with the goods produced or manufactured in India.
    • Protective Duty: To protect interests of Indian industry
    • Safeguard Duty: It is imposed to safeguard the interest of our local domestic industries. It is calculated on the basis of loss suffered by our local industries.
    • Anti-dumping Duty: Manufacturers from abroad may export goods at very low prices compared to prices in the domestic market. In order to avoid such dumping, ADD is levied.

     

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  • Pak. may get off FATF ‘grey list’ after on-site check

    Pakistan got a reprieve from the Financial Action Task Force (FATF) as it announced that the country could be removed from the “grey list” after a visit by a fact-finding team.

    What is the news?

    • FATF noted Pakistan’s constructive claims of actions to curb terror funding.
    • It would formally be taken off the “grey list” in October.
    • China is working relentlessly to get Pakistan off FATF ‘grey list’.

    India’s stance

    • New Delhi has been sceptical of Pakistan’s commitment to completely end terror safe havens in the country.
    • Infiltration in J&K continues and small arms and IEDs are being habitually pushed across the LoC.

    What is the FATF?

    • The FATF is an international watchdog for financial crimes such as money laundering and terror financing.
    • It was established at the G7 Summit of 1989 in Paris to address loopholes in the global financial system after member countries raised concerns about growing money laundering activities.
    • In the aftermath of the 9/11 terror attack on the US, FATF also added terror financing as a main focus area.
    • This was later broadened to include restricting the funding of weapons of mass destruction.
    • The FATF currently has 39 members.

    Working of FATF

    • The decision-making body of the FATF, known as its plenary, meets thrice a year.
    • Its meetings are attended by 206 countries of the global network.
    • It includes members, and observer organisations, such as the World Bank, some offices of the UN, and regional development banks.

    Functions of FATF

    • The FATF sets standards or recommendations for countries to achieve in order to plug the holes in their financial systems and make them less vulnerable to illegal financial activities.
    • It conducts regular peer-reviewed evaluations called Mutual Evaluations (ME) of countries to check their performance on standards prescribed by it.
    • The reviews are carried out by FATF and FATF-Style Regional Bodies (FSRBs), which then release Mutual Evaluation Reports (MERs).
    • For the countries that don’t perform well on certain standards, time-bound action plans are drawn up.
    • Recommendations for countries range from assessing risks of crimes to setting up legislative, investigative and judicial mechanisms to pursue cases of money laundering and terror funding.

    What are the Black List and the Grey List?

    • The words ‘grey’ and ‘black’ list do not exist in the official FATF lexicon.
    • They however designate countries that need to work on complying with FATF directives and those who are non-compliant.
    1. Black List: The blacklist, now called the “Call for action” was the common shorthand description for the FATF list of “Non-Cooperative Countries or Territories” (NCCTs).
    2. Grey List: Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.

    Consequences of being:

    (1) In the grey list:

    • Economic sanctions from IMF, World Bank, ADB
    • Problem in getting loans from IMF, World Bank, ADB and other countries
    • Reduction in international trade
    • International boycott

    (2) In the black list:

    • High-risk jurisdictions subject to call for action
    • Countries have considerable deficiencies in their AML/CFT (anti-money laundering and counter terrorist financing) regimens
    • Enhanced due diligence
    • Members are told to apply counter-measures such as sanctions on the listed countries

    Note: Currently, North Korea and Iran are on the black list.

    Pakistan and FATF

    • Pakistan, which continues to remain on the “grey list” of FATF, had earlier been given the deadline till the June to ensure compliance with the 27-point action plan against terror funding networks.
    • It has been under the FATF’s scanner since June 2018, when it was put on the Grey List for terror financing and money laundering risks.
    • FATF and its partners such as the Asia Pacific Group (APG) are reviewing Pakistan’s processes, systems, and weaknesses on the basis of a standard matrix for anti-money laundering (AML) and combating the financing of terrorism (CFT) regime.

    Why is Pakistan on the grey list?

    • Pakistan has found itself on the grey list frequently since 2008, for weaknesses in fighting terror financing and money laundering.
    • It never addressed concerns on the front of terror financing investigations and prosecutions targeting senior leaders and commanders of UN-designated terrorist groups.
    • However, now steps had been taken in this direction such as the sentencing of terror outfit chief Hafiz Saeed, prosecution of Masood Azhar and seizure of their properties.
    • India meanwhile, a member of FATF, suspects the efficacy and permanence of Pakistani actions.

    How FATF impacts Pakistan?

    • The FATF grey list made it more difficult for Pakistan to get financial aid from the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and the European Union (EU).
    • This will further create an economic crisis for Pakistan which is already struggling to control its financial position.
    • Bearing the cost of global politics the impact of FATF grey-listing on Pakistan’s economy has claimed that FATF’s decision has led to a loss of USD 38 billion for Pakistan so far.

    Steps taken by Pakistan

    • Pakistan is currently banking on its potential exclusion from the grey list to help improve the status of tough negotiations with the International Monetary Fund to get bailout money.
    • Pakistan is now making a high-level political commitment to the FATF and APG to address its strategic AML/CFT deficiencies.

     

     

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  • Back in news: Foreign Contribution Regulation Act (FCRA)

    The Union Home Ministry has placed a US based NGO on its watchlist following an investigation that foreign contributions it sent were being used for climate awareness campaigns, an activity not permissible under the FCRA [Foreign Contribution (Regulation) Act].

    About Foreign Contribution Regulation Act (FCRA)

    • The FCRA regulates foreign donations and ensures that such contributions do not adversely affect internal security.
    • First enacted in 1976, it was amended in 2010 when a slew of new measures was adopted to regulate foreign donations.
    • The FCRA is applicable to all associations, groups and NGOs which intend to receive foreign donations.
    • It is mandatory for all such NGOs to register themselves under the FCRA.
    • The registration is initially valid for five years and it can be renewed subsequently if they comply with all norms.

    Why was FCRA enacted?

    • The FCRA sought to consolidate the acceptance and utilisation of foreign contribution or foreign hospitality by individuals, associations or companies.
    • It sought to prohibit such contributions from being used for activities detrimental to national interest.

    What was the recent Amendment?

    • The FCRA was amended in September 2020 to introduce some new restrictions.
    • The Government says it did so because it found that many recipients were wanting in compliance with provisions relating to filing of annual returns and maintenance of accounts.
    • Many did not utilise the funds received for the intended objectives.
    • It claimed that the annual inflow as foreign contributions almost doubled between 2010 and 2019.
    • The FCRA registration of 19,000 organisations was cancelled and, in some cases, prosecution was also initiated.

    How has the law changed?

    There are at least three major changes that NGOs find too restrictive.

    • Prohibition of fund transfer: An amendment to Section 7 of the Act completely prohibits the transfer of foreign funds received by an organisation to any other individual or association.
    • Directed and single bank account: Another amendment mandates that every person (or association) granted a certificate or prior permission to receive overseas funds must open an FCRA bank account in a designated branch of the SBI in New Delhi.
    • Utilization of funds: Fund All foreign funds should be received only in this account and none other. However, the recipients are allowed to open another FCRA bank account in any scheduled bank for utilisation.
    • Shared information: The designated bank will inform authorities about any foreign remittance with details about its source and the manner in which it was received.
    • Aadhaar mandate: In addition, the Government is also authorised to take the Aadhaar numbers of all the key functionaries of any organisation that applies for FCRA registration or for prior approval for receiving foreign funds.
    • Cap on administrative expenditure: Another change is that the portion of the receipts allowed as administrative expenditure has been reduced from 50% to 20%.

    What is the criticism against these changes?

    • Arbitrary restrictions: NGOs questioning the law consider the prohibition on transfer arbitrary and too heavy a restriction.
    • Non-sharing of funds: One of its consequences is that recipients cannot fund other organisations. When foreign help is received as material, it becomes impossible to share the aid.
    • Irrationality of designated bank accounts: There is no rational link between designating a particular branch of a bank with the objective of preserving national interest.
    • Un-ease of operation: Due to Delhi based bank account, it is also inconvenient as the NGOS might be operating elsewhere.
    • Illogical narrative: ‘National security’ cannot be cited as a reason without adequate justification as observed by the Supreme Court in Pegasus Case.

    What does the Government say?

    • Zero tolerance against intervention: The amendments were necessary to prevent foreign state and non-state actors from interfering with the country’s polity and internal matters.
    • Diversion of foreign funds: The changes are also needed to prevent malpractices by NGOs and diversion of foreign funds.
    • Fund flow monitoring: The provision of having one designated bank for receiving foreign funds is aimed at making it easier to monitor the flow of funds.
    • Ease of operation: The Government clarified that there was no need for anyone to come to Delhi to open the account as it can be done remotely.

     

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  • What are Swiss Banks?

    A whistleblower has leaked information on more than $100 billion held in 30,000 accounts of Zurich-headquartered Credit Suisse, one of the world’s most infamous banks which hold black money.

    What is the news?

    • The investigation refocused attention on Swiss banks and their famous, century-old culture of secrecy.
    • This swiss tradition is under pressure as countries around the world try to get their super-rich to pay legitimate taxes on their wealth.

    Swiss Banks: Defined by Secrecy

    • Since at least the beginning of the 18th century, Geneva had become a favoured destination of French royalty and other European elites seeking discreet havens to stash their wealth.
    • In 1713, Swiss government authorities announced laws prohibiting bankers from giving out information about their customers.
    • Thus began a powerful culture of silence and secrecy that went on to become the defining feature of Swiss banking.
    • In 1934, Switzerland passed the Federal Act on Banks and Savings Banks, commonly known as the Banking Law of 1934 or the Swiss Banking Act.

    What’s behind this upmost secrecy?

    • Article 47 made it a crime to reveal details or information of customers to almost anyone — including the government — without their consent and in the absence of a criminal complaint.
    • Violators can get five years in prison; Article 47 lies at the heart of some of the most stringent banking secrecy laws anywhere.

    Why are they favourite destination to park black money?

    • As wealth became easily mobile across international borders, the safety and stability of Swiss banks, located in a peaceful country presented an irresistible attraction for the super-rich.
    • Switzerland itself is a politically neutral country.
    • Swiss bank accounts are attractive to depositors because they combine low levels of risk with very high levels of privacy.
    • The Swiss economy is extremely stable, and the banks are run at very high levels of professionalism.
    • Almost any adult in the world can open an account in a Swiss bank. Opening an account is not difficult, and requires not much more than basic KYC, including a proof of identity such as a passport.

    Question of ‘black money’

    • “Black money” allegedly stashed away by Indians in Swiss banks is a political issue in India, and parties and political functionaries have often made promises to “bring it back”.
    • Swiss authorities have maintained that they cooperate with the Indian government to fight tax evasion and fraud.

    Indian motives and moves

    • The two countries have had a system of automatic exchange of information in tax matters since 2018.
    • Under this, detailed financial information on all Indian residents with accounts in Swiss financial institutions was provided for the first time to Indian authorities in September 2019.

     

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  • Prevention of Money Laundering Act (PMLA)

    The Supreme Court is looking into allegations of the metamorphosis of the Prevention of Money Laundering Act (PMLA), brought to sniff out drug money, into a potent weapon to raid rivals and deny rights.

    What is meant by money laundering?

    • Money laundering is the process of making significant amounts of money obtained through criminal activities, such as drug trafficking or terrorist funding, appear to have come from a legitimate source.
    • Large profits are made by illegal arms sales, drug trafficking, smuggling and prostitution rings, insider trading, bribery, and computer fraud schemes.
    • As a result, it provides an incentive for money launderers to “legitimize” their ill-gotten gains through money laundering.
    • The money generated is referred to as ‘dirty money,’ and money laundering is the act of converting ‘dirty money’ into ‘legitimate’ money.

    Money Laundering Procedure:

    It is a 3-stage process. They are:

    • Placement: The first stage involves the injection of crime money into the formal financial system.
    • Layering is the second stage, money injected into the system is layered and spread over various transactions in order to conceal the money’s tainted origin.
    • Integration: In the third and final stage, money enters the financial system in such a way that the initial association with the crime is sought to be erased, and the money can then be utilized as clean money by the offender.

    Some of the most Common Money Laundering Methods:

    • Bulk cash smuggling, cash-intensive businesses, round-tripping,trade-based laundering, shell companies and trusts, bank capture, gambling, real estate, black salaries, fictional loans, hawala, and false invoicing

    Prevention of Money Laundering Act (PMLA)

    • PMLA, 2002 is an Act of the Parliament of India enacted by the NDA government to prevent money laundering and to provide for confiscation of property derived from money laundering.
    • It was enacted in response to India’s global commitment (including the Vienna Convention) to combat the menace of money laundering.
    • PMLA and the Rules notified there under came into force with effect from July 1, 2005.
    • The act was amended in the year 2005, 2009 and 2012.

    Objectives of PMLA

    The PMLA seeks to combat money laundering in India and has three main objectives:

    1. To prevent and control money laundering.
    2. To confiscate and seize the property obtained from the laundered money; and
    3. To deal with any other issue connected with money laundering in India.

    Key definitions

    • Payment System: A system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them. It includes the systems enabling credit card, debit card, smart card, money transfer or similar operations.
    • Money-laundering: Whosoever directly or indirectly attempts to indulge or assist other person or actually involved in any activity connected with the proceeds of crime and projecting it as untainted property.
    • Attachment: Prohibition of transfer, conversion, disposition or movement of property by an appropriate legal order.
    • Proceeds of crime: Any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence.

    Salient features

    • Punishment and Jail term: The Act prescribes that any person found guilty of money laundering shall be punishable with rigorous imprisonment from three years to seven years. The maximum punishment may extend to 10 years instead of 7 years.
    • Powers of attachment of tainted property: The Director or officer above the rank of Deputy Director with the authority of the Director, can provisionally attach property believed to be “proceeds of crime”.
    • Adjudicating Authority: It is the authority appointed by the central government which decides whether any of the property attached or seized is involved in money laundering.
    • Presumption in inter-connected transactions: Where money laundering involves two or more inter-connected transactions. It is presumed that the remaining transactions form part of such inter-connected transactions.
    • Burden of proof: A person, who is accused of having committed the offense of money laundering, has to prove that alleged proceeds of crime are in fact lawful property.
    • Appellate Tribunal: It is given the power to hear appeals against the orders of the Adjudicating Authority and any other authority under the Act. Its orders are not final and can be challenged.
    • Establishment of Special Court: To ensure speedy trial.

    Issues with PMLA

    • Misuse of central agencies: PMLA is being pulled into the investigation of even ordinary crimes by the Enforcement Directorate.
    • Seizing of assets: Assets of genuine victims have been attached. The ED could just walk into anybody’s house.
    • Politically motivated raids: In all this, the fundamental purpose of PMLA to investigate the conversion of “illegitimate money into legitimate money” was lost.
    • Opacity of charges: Petitioners pointed out that even the Enforcement Case Information Report (ECIR) – an equivalent of the FIR – is considered an “internal document” and not given to the accused.
    • Vagueness over evidences: The accused is called upon to make statements that are treated as admissible in evidence.
    • Harassment: The ED begins to summon accused persons and seeks details of all their financial transactions and of their family members.
    • Against individual liberty: The initiation of an investigation by the ED has consequences that have the potential of curtailing the liberty of an individual.

    Way ahead

    • It is unlikely that corruption can be substantially reduced without modifying the way government agencies operate.
    • The fight against corruption is intimately linked with the reform of the investigations.
    • Therefore the adjudicating authorities must work in cooperation and ensure the highest standards of transparency and fairness.

     

     

  • Missionaries of Charity denied FCRA nod

    The Union Home Ministry has refused to renew the Foreign Contribution Regulation Act (FCRA) registration of Missionaries of Charity (MoC) set up by Nobel laureate Mother Teresa.

    About Foreign Contribution Regulation Act (FCRA)

    • The FCRA regulates foreign donations and ensures that such contributions do not adversely affect internal security.
    • First enacted in 1976, it was amended in 2010 when a slew of new measures was adopted to regulate foreign donations.
    • The FCRA is applicable to all associations, groups and NGOs which intend to receive foreign donations.
    • It is mandatory for all such NGOs to register themselves under the FCRA.
    • The registration is initially valid for five years and it can be renewed subsequently if they comply with all norms.

    Why was FCRA enacted?

    • The FCRA sought to consolidate the acceptance and utilisation of foreign contribution or foreign hospitality by individuals, associations or companies.
    • It sought to prohibit such contributions from being used for activities detrimental to national interest.

    What was the recent Amendment?

    • The FCRA was amended in September 2020 to introduce some new restrictions.
    • The Government says it did so because it found that many recipients were wanting in compliance with provisions relating to filing of annual returns and maintenance of accounts.
    • Many did not utilise the funds received for the intended objectives.
    • It claimed that the annual inflow as foreign contributions almost doubled between 2010 and 2019.
    • The FCRA registration of 19,000 organisations was cancelled and, in some cases, prosecution was also initiated.

    How has the law changed?

    There are at least three major changes that NGOs find too restrictive.

    • Prohibition of fund transfer: An amendment to Section 7 of the Act completely prohibits the transfer of foreign funds received by an organisation to any other individual or association.
    • Directed and single bank account: Another amendment mandates that every person (or association) granted a certificate or prior permission to receive overseas funds must open an FCRA bank account in a designated branch of the SBI in New Delhi.
    • Utilization of funds: Fund All foreign funds should be received only in this account and none other. However, the recipients are allowed to open another FCRA bank account in any scheduled bank for utilisation.
    • Shared information: The designated bank will inform authorities about any foreign remittance with details about its source and the manner in which it was received.
    • Aadhaar mandate: In addition, the Government is also authorised to take the Aadhaar numbers of all the key functionaries of any organisation that applies for FCRA registration or for prior approval for receiving foreign funds.
    • Cap on administrative expenditure: Another change is that the portion of the receipts allowed as administrative expenditure has been reduced from 50% to 20%.

    What is the criticism against these changes?

    • Arbitrary restrictions: NGOs questioning the law consider the prohibition on transfer arbitrary and too heavy a restriction.
    • Non-sharing of funds: One of its consequences is that recipients cannot fund other organisations. When foreign help is received as material, it becomes impossible to share the aid.
    • Irrationality of designated bank accounts: There is no rational link between designating a particular branch of a bank with the objective of preserving national interest.
    • Un-ease of operation: Due to Delhi based bank account, it is also inconvenient as the NGOS might be operating elsewhere.
    • Illogical narrative: ‘National security’ cannot be cited as a reason without adequate justification as observed by the Supreme Court in Pegasus Case.

    What does the Government say?

    • Zero tolerance against intervention: The amendments were necessary to prevent foreign state and non-state actors from interfering with the country’s polity and internal matters.
    • Diversion of foreign funds: The changes are also needed to prevent malpractices by NGOs and diversion of foreign funds.
    • Fund flow monitoring: The provision of having one designated bank for receiving foreign funds is aimed at making it easier to monitor the flow of funds.
    • Ease of operation: The Government clarified that there was no need for anyone to come to Delhi to open the account as it can be done remotely.

     

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