From UPSC perspective, the following things are important :
Prelims level : Swiss Banks
Mains level : Black Money Issue
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.
From UPSC perspective, the following things are important :
Prelims level : Cryptocurrency
Mains level : 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.
- 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.
From UPSC perspective, the following things are important :
Prelims level : Enforcement Directorate, PMLA
Mains level : Read the attached story
The Enforcement Directorate (ED) is in the news now and often.
About Enforcement Directorate (ED)
- It goes back to May 1, 1956, when an ‘Enforcement Unit’ was formed in the Department of Economic Affairs.
- It then aimed for handling Exchange Control Laws violations under the Foreign Exchange Regulation Act (FERA).
- The ED today is a multi-dimensional organisation investigating economic offences under the Prevention of Money Laundering Act (PMLA), Fugitive Economic Offenders Act, Foreign Exchange Management Act and FERA.
From where does the ED get its powers?
- When proceeds of crime (property/money) are generated, the best way to save that money is by parking it somewhere, so one is not answerable to anyone in the country.
- Therefore, there was a need to control and prevent the laundering of money.
- The PMLA was brought in for this exact reason in 2002, but was enacted only in 2005.
- The objective was to prevent parking of the money outside India and to trace out the layering and the trail of money.
- So as per the Act, the ED got its power to investigate under Sections 48 (authorities under act) and 49 (appointment and powers of authorities and other officers).
At what stage does the ED step in when a crime is committed?
- Whenever any offence is registered by a local police station, which has generated proceeds of crime over and above ₹1 crore, the investigating police officer forwards the details to the ED.
- Alternately, if the offence comes under the knowledge of the Central agency, they can then call for the First Information Report (FIR) or the chargesheet if it has been filed directly by police officials.
- This will be done to find out if any laundering has taken place.
What differentiates the probe between the local police and officers of the ED?
- If a theft has been committed in a nationalised bank, the local police station will first investigate the crime.
- If it is learnt that the founder of the bank took all the money and kept it in his house, without being spent or used, then the crime is only theft and the ED won’t interfere because the amount has already been seized.
- But if the amount which has been stolen is used after four years to purchase some properties, then the ill-gotten money is brought back in the market.
- Or if the money is given to someone else to buy properties in different parts of the country, then there is ‘laundering’ of money.
- Hence the ED will need to step in and look into the layering and attachment of properties to recover the money.
- If jewellery costing ₹1 crore is stolen, police officers will investigate the theft. The ED, however, will attach assets of the accused to recover the amount of ₹1 crore.
What are the other roles and functions of the ED?
- The ED carries out search (property) and seizure (money/documents) after it has decided that the money has been laundered, under Section 16 (power of survey) and Section 17 (search and seizure) of the PMLA.
- On the basis of that, the authorities will decide if arrest is needed as per Section 19 (power of arrest).
- Under Section 50, the ED can also directly carry out search and seizure without calling the person for questioning.
- It is not necessary to summon the person first and then start with the search and seizure.
- If the person is arrested, the ED gets 60 days to file the prosecution complaint (chargesheet) as the punishment under PMLA doesn’t go beyond seven years.
- If no one is arrested and only the property is attached, then the prosecution complaint along with attachment order is to be submitted before the adjudicating authority within 60 days.
Can the ED investigate cases of money laundering retrospectively?
- If an ill-gotten property is acquired before the year 2005 (when the law was brought in) and disposed off, then there is no case under PMLA.
- But if proceeds of the crime were possessed before 2005, kept in storage, and used after 2005 by buying properties, the colour of the money is still black and the person is liable to be prosecuted under PMLA.
- Under Section 3 of PMLA, a person shall be guilty of money-laundering, if such person is found to have directly or indirectly attempted to indulge or knowingly assist a party involved in one or more of the following activities:
- Concealment; possession; acquisition; use; or projecting as untainted property; or claiming as untainted property in any manner etc.
Are there any provisions in UN which can help us chase black money?
Yes, there are a few. And they might help us get black money back in India. Let’s look at the history of such negotiations to learn more about them and hone your understanding for Probable questions for IAS Mains.
- Tough negotiations on this subject in Vienna, Austria, in 2003 was a vital part of the United Nations Convention Against Corruption (UNCAC).
- The first breakthrough came when the group established asset recovery as a “fundamental principle” of the convention.
- Then it was only a matter of laying a framework, in both civil and criminal law, for tracing, freezing, forfeiting and returning funds obtained through corrupt activities.
- What did the convention accomplish? Legal obstacles should be tackled with international cooperation rather than by domestic laws.
- Some of the relevant provisions of the convention are crucial to the question of recovery of assets.
- It provides that each state party shall take such measures as may be necessary to permit its competent authorities to give effect to an order of confiscation issued by a court of another state party.They are also required to share information with the competent authorities of another state, when necessary, to investigate, claim and recover proceeds of offences.
The UN, through its Office on Drugs and Crime, which leads the fight against illicit drugs and international crime, has been given the responsibility to implement the convention, particularly its assets recovery provisions.
Refining India’s approach
- In the case of India, difficulties may have arisen not in establishing that the sums amassed abroad belong to India, but in proving that the assets were illegally obtained.
- There is a need of domestic management and disposal of seized and confiscated assets and the management of the return and disposal of assets recovered in the context of international corruption cases.