Dirty Laundry

If the existing laws are ineffective, is a new law the answer? With liberalisation and opening up, cross-border money laundering has become a major issue. Most recent scams involve cross-border money laundering and violations of Fera. Whether Fera in its present form deserves to be on the statute books is debatable, since it is a legacy of an era when foreign exchange was perceived to be scarce and needed to be rationed. On money laundering, three channels have historically been important. First, there is under-invoicing of exports, which was responsible for much of the capital flight before 1991. With a more realistic exchange rate, under-invoiced exports have been replaced by over-invoiced exports. This permits black money to be converted into white. It also enables exporters to obtain Section 80 HHC benefits. Second, there are over-invoiced imports, which can be used to launder money, but they also involve the payment of higher customs duties. Third, one can use NRI deposits.

 

The proposed draft legislation apparently imparts greater transparency to all transactions (beyond a threshold) conducted through banking channels. However, there is a problem with what the government is proposing. As global capital flows become more complicated, aided by developments in information technology, channels of money laundering change form. For instance, most global money laundering does not take place through banking channels any more. There is a Paris-based organisation known as the Financial Action Task Force (FATF), set up by G-7 to address the problem of money laundering. One hopes the government has seen the FATF reports, and that it can form a comprehensive response to the problem rather than resorting to ad hoc legislative proposals.