Trade Based Money Laundering compliance and challenges

Transcription

1 Trade Based Money Laundering compliance and challenges

2 Schema Overview Challenges Legislation Case Studies Operational issues Way forward

3 How money moves? Through financial system Physical movement Movement of value (through goods and services) 3

4 Techniques /Methods of Money Laundering Currency Exchanges Structuring / smurfing Use of credit cards Wire transfers Alternative remittance services Investment in capital markets Use of offshore banks /businesses

5 Techniques /Methods of Money Laundering contd Use of nominees,trusts or third parties Use of foreign bank accounts Use of shell companies Abuse of non profit organizations Gaming activities Identity fraud Use of gatekeeper professional services

6 Techniques /Metods of Money Laundering contd Cash couriers Purchase of portable valuable commodities Purchase of valuable assets Trade based money laundering Mingling

7 Money Laundering The front door of money laundering is the banking system. the government has done a pretty good job of closing the front door, but the back door international trade is wide open [John Zdanowicz ] Inherent vulnerabilities in the international trade system provide abundant opportunity for criminal organisations and terrorist groups to transfer value across borders [FATF]

8 Why Money Laundering What it is? Wealth generated illegally or not declared for tax purposes What are the activities that generate Black Money? Range of activities: racketeering, trafficking in counterfeit and contraband goods, smuggling, trade of narcotics, forgery, illegal mining, illegal felling of forests, illicit liquor trade, robbery, kidnapping, human trafficking, sexual exploitation and prostitution, cheating and financial fraud, embezzlement, drug money, bank frauds, and illegal trade in arms 8

9 What is Money Laundering? Money Laundering is the process by which illegal funds and assets are converted into legitimate funds and assets.

10 Money Laundering Stages

11 Trade-based money laundering (TBML) The process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins.

12 Trade based Money Laundering (TBML) FATF has recognized misuse of the trade system as the main method (about 65%) by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it to the formal economy.

13 Magnitude? APG Typology Report on Trade Based Money Laundering adopted in July 2012 by the Asia Pacific Group on Money Laundering suggests about 2 to 5 % of the World GDP World GDP* ~ 69,993 Billion USD USD 1,400 (840) to 3,500 (2100) Billion * (source: World Development Indicators Date base World Bank Sept 2012)

14 Indian Scenario India lost $343.93* billion (2002 to 2011) to illegal outflows, making it the fifth-largest exporter of illicit money in the world. India s illegal outflows stood at $84.93 billion in financial year * Global Financial Integrity (December 2013)

15 Basic Methods Trade Mis-pricing : Over and under invoicing of goods and services Spilt Invoicing : Multiple/ Multilevel invoicing for single consignment of goods or services Quantity Manipulation : Over and under shipments of goods and services Mis-description : Mis-declaration of goods of imports and exports (description, quality etc.) Concealment : contraband in cover cargo Phantom shipping

16 TBML in Indian context Undervaluation of Imports Preparing false set of invoices to avoid Customs duty Sending the differential value through Hawala Conservative estimates suggest undervaluation to the tune of 2000 Crs./yr on Electronic Goods alone

17 TBML in Indian context Contd.- Overvaluation of Imports Mainly done to take benefits of some incentive scheme, or zero rated imports (to transfer money abroad). Example: overvaluation of goods to claim benefit under Textile up-gradation Fund Scheme (TUFS) Estimated loss to the exchequer is to the tune of 900 Crs in the last 2 years.

18 TBML in the Indian context contd Overvaluation of coal. Overvaluation of diamonds.

19 TBML in Indian context contd.- Overvaluation of Exports Done to take benefits of export promotion scheme To bring in money from abroad Examples: higher drawback; fms,fps,status, etc.

20 TBML in Indian context Undervaluation of Exports Done mainly to launder money or stash money abroad. To evade duty (in case of export duty) Examples: export of Iron ore, etc

21 TBML in Indian context contd.- Proxy Imports Benami imports; mostly consumer goods which could be sold in cash; grossly undervalued ( 1/3 to 1/2 of actual value); sometimes contraband concealment. IEC holder : mostly poor & unemployed, paid small consideration; discarded after few imports. Mostly outside tax net : Customs (partly); VAT, Income Tax (fully)

22 International efforts UN Convention of 1988 (Vienna Convention) Economic Summit of Group of Seven, 1989 FATF set up in 1989 SAARC Regional Convention on Suppression of Terrorism, 2002

23 Indian Legislation Prevention of Money Laundering Act 2002 An Act to prevent money laundering and to provide for confiscation of property derived from, or involved in money laundering and for matters connected or incidental thereto

24 Indian Legislation contd FEMA BENAMI TRANSACTION PROHIBITION ACT COFEPOSA

25

26 Gold smuggling scenario GFMS estimate of gold smuggling into India last year is 200 MT DRI estimated around MT Quantum of legal SEZ imports diverted can be significant Total amount moved through unofficial channels is Rs cr

27 Circular trading in Gold and Diamond jewellery Consignments of Diamond Jewellery imported from Hong Kong/Dubai for export processing Cosmetic Processing and reshuffling of jewellery between consignments at overseas transshipment W/Hs and SEZ Transactions between related parties

28 Red Sanders [Pterocarpus Santalum]

29 Red Sanders Total seizures by DRI in last 10 yrs: 2000 MT Seizures are about 5% of the traffic. Est. smuggling volume : MTs/Yr. Est. Smuggling Turnover : $ Mn /Yr =Rs Crs /Yr. (@ current grey market export price of $ 70-80/kg.) Est. profit per 40 container (20MT): Rs. 2 Crs.

30 A typical Modus Operandi CHINA via Dubai Syndicate Factory stuffed with genuine goods Divert container, replace goods with Red Sanders Onions, Mango Pulp, Towels etc. Replace Seal with duplicate forged seal Port of Export

31 Estimated quantity being smuggled tonnes/month.

32 Cigarette Smuggling Modus Operandi : Mostly disguised in containers with cover cargo like furniture, toys at front; Benami Imports; clearance by setting; containers mostly originating from Malaysia, Indonesia; packages conforming to Indian regulation. Profitability: Rs. 2.5Crs (40 ft contr.)

33 Cigarette Smuggling

34 Overvaluation case :Power Project Importer - in India (Turbines, generators, boilers, transformers) Value of goods declared Rs 9048 cr Exporters - in China/Korea (OEM manufacturers) Actual value of goods Rs 3580 cr Documents through Intermediary Dubai invoice value Rs 9048 Goods sent directly from China to India Payments made to Intermediary in Dubai who in turn paid to Exporters Extra amount sent to Holding company in Mauritius Rs 5468 Cr

35 Overvaluation of carpets Local MV.Rs 200 Export value Rs 8000 Export incentive Rs 1300 Remittance from third party or no remittance Actual admissibility only Rs 30

36 Overvaluation of ready made garments Garments exported to country B by a1,a2,a3,a4 A1 owned by truck driver,a2and a3 not traceable,a4 a well known exporter, goods goes to country B to b1,b2,b3,b4 B1,b2,b3,b4 are all Indian owned companies Total transaction Rs 8000 crores B2,B3,B4 denies buying goods from exporters

37 Overvaluation of ready made garments contd Remittance from c1,c2,c3,c4 from country C All Indian owned companies Exporter buy stuff from d1,d2,d3,d4 etc They don t file return Part of remittance goes to diamond traders from exporters and suppliers Diamond traders send the money to c1,c2,c3,c4 to buy diamonds

38 Operational Issues Facilitation of trade goods and services Global Trade of about USD 30.7 Trillion USD Trillion exports and equivalent imports Easy to camouflage! Long Supply Chain Cross referencing between trade data and finance data Currency conversions

39 TBML emerging concerns Economic Revenue Loss Parallel Economy: Proxy Imports & Black money Counterfeiting and Piracy Damage to Financial Institutions Social Corruption Institutional subversion Significant overlap of operators Security Threat to supply chain Organised crime & Terror funding

40 Possible Strategies? Integrated Approach along eco chain Intl. Trade Data Reconciliation Mechanism TTU (like DARTTS of US) FTAs/PTAs must provide for data exchange : at least at 4-digit HS level International Cooperation C2C from MAA to real time data exchange Creating a Global Network (GNC) *Data Analysis and Research for Trade Transparency System (DARTTS)

41 Red Flags for compliance authorities Proper monitoring of advance remittances Third party remittance of exporters to be scrutinised thoroughly Manual bills of entry to be verified with custom houses EDI bills of entry relating to diamonds to be verified from custom houses High sea sales documents to be verified

42 Red Flags for compliance authorities contd Multiple subthreshold transactions in to accounts- cash, RTGS Immediate withdrawals of money from accounts Large number of cash transactions

43 Thank You