ED probing legal remittance routes after note ban

Has 3-day meet on action plan; officials believe up to Rs 3,000 cr was taken out of the country

The legal routes available to resident Indians and companies to send money abroad are being examined by the Union finance ministry's Enforcement Directorate (ED).

The agency suspects some outward remittance routes, such as the Liberalised Remittance Scheme (LRS) and advance import remittances, could have been misused during the demonetisation drive. All categories of outward remittances are being looked into, to check whether the disclosure requirements and purpose of sending money was genuine, said a senior ED official.

The ED prepared a plan in a three-day meeting in Mumbai on January 17-19, chaired by its head, Karnal Singh. Personnel were directed to check details of all categories of remittances in the past two months, said an official who was there.

An individual is permitted to remit up to $250,000 under LRS. This may be used to buy immovable property, invest in equity or debt, for education or medical reasons. As per RBI data, outward remittance under LRS for November 2016 was $620.8 million (Rs 4,200 crore), as compared to $333.4 million in the same month a year before. Outflow of funds for travel and for maintenance of close relatives abroad has been showing a jump for some months.

Also, the ED is believed to be examining some private and public sector banks for possible breach of the the anti-money laundering and know-your client norms. "There are instances where lenders were allowing dubious transactions and lowering their guard against tax dodgers," the official said.

ED officials estimate Rs 2,500-3,000 crore was taken out of the country under the guise of remittances, of which Rs 700 crore has been established. "In some of the cases, the advance remittances shown in the books of exporters went to shell companies abroad," the official added.

He said the money taken out of the country was shown as payment towards import, with an inflated value of goods. Most of the money sent abroad was first deposited in the accounts of shell companies. With several layers of transactions, the difference between remittance and actual cost of goods would then be transferred into the exporter's account in India. In some cases, the company in question showed it had exported finished metal but no remittance was received, disclosed the official.

An example cited was of Rajeshwari Exports, where the ED has registered a case for allegedly misusing the advance remittance route and gained Rs 1,500 crore in a year. The officer said similar methods had been adopted by other companies while placing orders for import of precious metals through advance remittance.

Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services, said: "Any kind of funds transfer attempted by individuals to come out of the tax net need to be scrutinised, as the 50 days of demonetisation drive was not only for depositing or exchanging old notes but to catch tax evaders." In that period, if a person had transferred a significant amount of money abroad or someone received a large amount, an explanation would have to be given to the tax authorities, he added.

Banks are supposed to identify unusual activity in remitting money aboard; this might get missed on occasion. However, irrespective of demonetisation, there is a mechanism for compliance with the rules for fund transfers abroad, added Parekh.