December 2, 2022



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Cash laundering within the banking sector has been a recurring
motif in India for over a century. The earliest identified types of financial institution
frauds embrace, amongst different issues, forging of devices,
accounting irregularities and inflation of belongings. Over time,
cash laundering within the banking system has turn out to be extra frequent and
refined with the appearance of internet-based banking resulting in
improve within the quantum of cash concerned in such instances. A lot
just lately, in February 2022, India witnessed its largest ever financial institution
fraud of INR 22,842 crores (approx. USD 3 billion) that concerned
ABG Shipyard Ltd., a shipbuilding and restore firm.

Legal guidelines in opposition to cash laundering in India

The Indian authorized framework has a number of legal guidelines geared toward regulating
and minimising the menace of cash laundering. The newest
addition is below the Finance Act, 2019 (Finance
Act
), which was handed to implement the monetary
proposals of the Central Authorities for the monetary 12 months
2019-2020. The Finance Act in its Half XIII launched provisions
to bolster the Prevention of Cash-laundering Act, 2002
(PMLA).

Some important developments made within the PMLA via the
Finance Act embrace:

  1. The reason added to Part 3 of the PMLA supplies {that a}
    particular person could be responsible of the offence of cash laundering if discovered
    to have, straight or not directly, tried to take pleasure in
    concealment, possession, acquisition, or the usage of the proceeds of
    crime. The modification additionally clarifies that the method or exercise
    related with the proceeds of crime continues till an individual is
    straight or not directly having fun with the proceeds of crime. This
    growth widens an individual’s involvement with the
    proceeds of crime” whereas performing an act of
    cash laundering and provides to the chunk energy of the regulatory
    authorities.

  2. Sub-section (3) below Part 12AA of the PMLA states that
    the place any specified transaction undertaken by a consumer is deemed
    suspicious, the reporting entity shall improve the long run
    monitoring of the enterprise relationship with the consumer, together with
    larger scrutiny of such transactions.

  3. The reason added to Part 44(1)(d) clarifies that
    enquiry or trial below the PMLA won’t be dependent upon any
    orders handed in respect of the related scheduled
    offence.1 In different phrases, the trial of each units of
    offences by the identical court docket shall not be construed as a joint trial.
    Beforehand, there was a authorized concern that if the accused had been to
    be acquitted of related scheduled offence costs, the
    prosecution below the costs of the PMLA would additionally fail. Nevertheless,
    with this clarification, the scope and powers of particular courts
    whereas coping with offences below the PMLA turns into clear.

  4. Extra powers are given to the Enforcement Directorate
    (ED), the specialised monetary investigation
    company, for dealing with financial crimes in India. The modification, by
    advantage of the Finance Act, now permits the ED to conduct search and
    seizure operations unbiased of a scheduled offence; make
    enhanced scrutiny and arrests with out warrants; and deal with cash
    laundering as a cognizable and non-bailable offence.

Current cash laundering instances within the banking sector

Having mentioned the current developments on the legislative
entrance, it will be attention-grabbing to undergo current cash
laundering issues that made it to the headlines.

ABG Shipyard Case

A agency based mostly in Gujarat, ABG Shipyard Ltd. (ABG
SL
), purportedly defrauded banks of INR 22,842 crore
(approx. USD 3 billion). The corporate allegedly created an internet of
transactions to cheat a consortium of 28 banks led by State Financial institution of
India (SBI) and the ICICI financial institution. In keeping with
Central Bureau of Investigation (CBI), ABG SL took
loans from banks after which diverted them to be used in different functions.
ABG SL allegedly made investments in abroad subsidiaries from the
mortgage quantities, purchased belongings within the names of affiliated firms,
and likewise transferred cash to a number of associated events. A forensic
audit with the assistance of Ernst and Younger was carried out by SBI in
January 2019, during which it was discovered that the fraud befell over
a interval of 5 years from April 2012 to July 2017. The findings
of the audit report additional revealed that the fraud was executed
via “diversion of funds, misappropriation and prison
breach of belief, with an goal to realize unlawfully on the price
of the financial institution’s funds.” Whereas the fraud was recognized in
June 2019 by a “Fraud Identification Committee” of SBI,
the primary criticism was made to the CBI, a lot later, in November
2019.

ICICI Financial institution – Videocon Case

The matter is centred round Chanda Kochhar, former MD and CEO
of the ICICI Financial institution and her husband, Deepak Kochhar. The ED had filed
its cost sheet in early November 2020 in relation to its
investigation considerations transactions between Videocon Group and
NuPower Renewables Pvt. Ltd., operated by Deepak Kochhar.
Reportedly, the rip-off first got here to mild in 2016, when Arvind
Gupta, an investor in each ICICI Financial institution and Videocon Group,
recognized the dealings between the businesses and wrote a letter to
the Prime Minister, the Governor of the Reserve Financial institution of India and
different authorities, demanding a probe on account of potential
battle of curiosity. Nevertheless, it was solely after a second
whistle-blower that raised comparable allegations in opposition to Chanda
Kochhar, in 2018, {that a} detailed investigation was initiated and
a number of authorities bought concerned. Investigating authorities
apprehended Kochhar having recognized her sanction of sure loans
of INR 1875 crores (approx. USD 243 million) from ICICI Financial institution to
Videocon Group, in change for kickbacks via her husband’s
enterprise entities. The ED provisionally connected over INR 78 crores
(approx. USD 10.1 million) price of moveable and immoveable belongings
of the Kochhars, which was adopted by the arrest of Deepak Kochhar
and Chanda Kochhar in September 2020 below the PMLA. In February
2021, Chanda Kochhar was granted bail by the particular court docket in
Mumbai. This was adopted by the Deepak Kochhar being granted bail
in March 2021 by the Excessive Courtroom of Bombay.

Sure Financial institution – DHFL Case

The case revolved round Rana Kapoor, the founder and former CEO
of Sure Financial institution, and the credit score amenities offered to Dewan Housing
Finance Restricted (DHFL) throughout his tenure at Sure
Financial institution. It was alleged Rana Kapoor secured substantial private
financial advantages in opposition to the credit score amenities offered to DHFL.
The advantages included amongst others issues – (i) kickbacks price
over INR 900 crores (approx. USD 116 million) from the promoter of
DHFL within the type of loans to an organization wholly owned by Rana
Kapoor’s daughters; and (ii) a purchase order of a bungalow in Delhi
from the promoter of Avantha Group at a grossly undervalued value.
Intensive investigation within the matter revealed sure
irregularities within the loans which Kapoor accredited to DHFL. As a
outcome, in July 2020, the ED connected properties price
roughly INR 2203 crores (approx. USD 286 million), together with
the private property of the Kapoor household. Rana Kapoor and members
of his household have been positioned below arrest by the ED on completely different
events through the investigation. On February 2022, a particular
court docket in Mumbai below the PMLA granted bail to Rana Kapoor, his
spouse Bindu and Avantha Group promoter Gautam Thapar within the case
pertaining to the property sale in Delhi. Nevertheless, Kapoor and
Thapar will not stroll out of the jail but, as they’re in custody
in one other case.

Punjab Nationwide Financial institution Case

The cash laundering case that shook the nation was that of the
Punjab Nationwide Financial institution. The rip-off alleged to have orchestrated by
diamantaires Nirav Modi and Mehul Choksi, concerned fraud of over
USD 2 billion. Not like the opposite instances mentioned above, this crime
is reported to have been carried out with the assistance of about 50
staff of the Punjab Nationwide Financial institution in a single specific department (in
Fort, Mumbai) whereas protecting the higher-up administration fully in
the darkish. The staff of the Brady Home department of Punjab
Nationwide Financial institution in Fort, Mumbai issued pretend financial institution ensures to allow
the diamantaires safe billions of {dollars} in international credit score.
Nirav Modi and Mehul Choksi secured over 1,200 such pretend ensures
with out elevating any suspicion. The Indian authorities have been
relentless of their makes an attempt to extradite the 2 businessmen, each
of whom are declared fugitives as of date. After over a 12 months of
search, in March 2019, Nirav Modi was reportedly noticed in London,
and Choksi is supposedly in Cuba to keep away from being extradited to
India, as Cuba has no extradition settlement with India. In June
2020, the ED introduced again INR 1135 crores (approx. USD 147 million)
price of diamonds, pearls and different jewelry belonging to abroad
entities owned by Nirav Modi and Mehul Choksi. The ED meant for
this jewelry to be formally seized below the PMLA. Presently,
Modi is in Wandsworth Jail in south-west London awaiting his
extradition trial.

How far have we come?

Regardless of the seemingly proactive method of the ED in cash
laundering issues, it has been a mammoth process to ascertain the
cash path in these instances. As of date, 4,700 instances are being
investigated by the ED. The variety of instances taken up for
investigation annually within the final 5 years differ from 111 instances
in 2015-16 to 981 in 2020-21. These numbers turn out to be some extent of
concern as solely 313 arrests have been made until date since 2002,
the 12 months during which the PMLA Act was enacted. Over the past 20 years
greater than 200 pleas are pending below PMLA. The statistics turn out to be
extra alarming once we examine it to different jurisdictions the place the
annual registration of instances below their cash laundering
laws is far increased; notably in UK (7,900), the U.S.
(1,532), China (4,691), Austria (1,036), Hong Kong (1,823), Belgium
(1,862) and Russia (2,764).

The issue in convicting offenders in cash laundering instances
is primarily because of the remoteness of the perpetrator(s) to the
prison exercise and proceeds of crime. Offenders typically spin a
advanced internet of connections and transactions to drag off a monetary
crime like these featured in order that the act can go unnoticed within the
unusual course of affairs. Even after the suspicious exercise is
detected, the sheer complexity of the prison exercise makes it
terribly troublesome, if not altogether inconceivable, to hint the
crime again to its masterminds. The typical time lag between the
date of prevalence of frauds and the date of detection was 23
months for the frauds reported in 2020-21. In respect of enormous
frauds of 100 crore and above, the common lag was of 57 months for
2020-2021. Even the Hon’ble Supreme Courtroom has harassed on the
want for a quick investigation as “money travels sooner than
mild”. The plight will get aggravated as even the Indian judicial
system is plagued with a notoriously sluggish tempo of decision of
instances, and there may be an limitless backlog that stands in the way in which of
time-efficient adjudication of issues.

Up until 2019, not less than 38 financial offenders like Nirav Modi and
Mehul Choksi are identified to have fled the nation to keep away from
prosecution. Apart from the actions taken by legislation enforcement companies,
it may be futile and publicly ill-received to pursue prosecution
with authorities useful resource expense if punishment is virtually
inconceivable. India, within the current previous, has adopted measures to
stop enterprise folks from fraudulently acquiring loans and
fleeing the nation to keep away from prosecution, together with the
implementation of the Fugitive Financial Offenders Act, 2018. This
laws authorises the federal government to connect all of the belongings
(together with the belongings acquired from the proceeds of crime) of an
particular person in opposition to whom an arrest warrant has been issued for
committing a scheduled offence the place the worth exceeds INR 100
crores (approx. USD 13 million). In furtherance to this, the 2018
modification to the Prevention of Corruption Act, 1988
(PCA), has criminalised the act of “giving
bribes” along with the act of “taking bribes”.
This modification has additionally made provisions concerning attachment and
administration of property procured via an offence below the
PCA, which was beforehand absent on this statute. One other instance
could be the inclusion of company fraud (as understood below the
Firms Act 2013), as a scheduled offence below the PMLA that
tightens the leash over firms and their officers.

The way in which ahead

The investigation, prosecution, in addition to profitable conviction
below the PMLA requires a multi-pronged method. Efficient
coordination and collaboration between numerous enforcement companies
such because the CBI, Narcotics Management Bureau, the Severe Fraud
Investigation Workplace, and the ED can show essential for correct
investigation. Additional, in instances of cross-border cash laundering,
mutual authorized help treaties with different states and the right
implementation of those treaties are the important thing to capturing financial
offenders. India has entered into mutual authorized help treaties
for asset restoration with many jurisdictions, together with the United
States of America, the UK and the United Arab Emirates,
to work in direction of worldwide cooperation in dealing with prison
issues. Modi’s arrest and trials within the UK are a visual
marker to criminals and for prison justice.

There are a number of elements which will support in mitigating fraud
dangers, together with however not limiting to, a mix of an efficient
fraud danger governance, robust fraud prevention and detection
methods (together with particular anti-fraud management processes), as
nicely as coordinated and well timed investigations and corrective
actions. The necessary aspect to recollect is that with evolving
fraud threats, banking establishments’ defensive methods additionally
must essentially sustain. Companies which are in a position to
institutionalize compliance in an efficient and environment friendly method
might create aggressive benefits, permitting them to finest pursue
their development agenda. The current legislative developments have been
a welcome transfer, coupled with proactive efforts of home (and
world) investigative authorities and judiciary, could have given
simply the correct of increase that’s wanted within the anti-money
laundering regime of India. Nevertheless, there’s a lengthy solution to go in
bolstering the Indian anti-money laundering regime extra
particularly in susceptible domains just like the banking sector. A
stricter remedy being meted out to financial offenders could act as
a deterrent and keep away from extra scams of likes of the ABG Shipyard,
ICICI Financial institution, Sure Financial institution or the Punjab Nationwide Financial institution rip-off.

Conclusion

Cash-laundering frauds within the banking sector is a largely
inevitable and recurring phenomenon. The whole elimination of
all sorts of financial institution fraud dangers is uneconomical and maybe,
unachievable. Through the first half of 2021-22, the whole reported
variety of instances of frauds amounted to 4,071 which is 14% increased
than the variety of instances (3,499) reported within the first half of
2020-2021.The statistics of the variety of frauds and the sums
concerned, when seen in isolation, could appear giant. Nevertheless, it’s
necessary to current the stated numbers in view of the unprecedented
improve within the banking exercise in India inside a brief span of
time. This contains the variety of deposit and credit score accounts in
banks and the massive volumes of transactions (in numbers in addition to
worth) which are processed by the banks on daily basis. The important thing takeaway
from the above-mentioned figures is that in view of the mammoth
development of the banking actions, the variety of frauds occurring
are very low and should not appear concern worthy. Nevertheless, this
statement is right solely when the frauds are restricted to small
sums. Clearly, a handful of fraudulent transactions involving large
sums of cash can take a toll on the well being of the financial system as
witnessed within the current years. To place it merely, the concept of fraud
is similar to that of a illness in an organism – fixed
supervision and preventive measures will guarantee efficient
remedy. Staying immune is the important thing. Nevertheless, overzealous
pathology will solely kill the organism.

The authors wish to acknowledge the analysis and
help rendered by Ms. Diya Dutta, a scholar of MNLU,
Mumbai.

Footnote

1. Judicial opinion even previous to the
modification of Part 44 of the PMLA held that the end result of the
investigation/prosecution in respect of the scheduled offence would
not have an effect on the end result of the investigation/prosecution below the
PMLA. See, Binod Kumar v. State of Jharkhand and Ors.,
(2011)11 SCC 463; and Radha Mohan Lakhotia v. The Deputy
Director, PMLA, Division of Income
(2010 (5) BomCR 625.

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