Legislative Go-By To Financial Crimes

Dissenting panel members refuse to endorse draft money laundering bill

Financial crimes like tax evasion and over-invoicing of exports have been dropped from the purview of the proposed money laundering bill, providing a potential legislative loophole for white collar crime.

The first draft of the bill, which was submitted to the finance ministry last week, has expectedly stirred a controversy. Some members of the committee set up to draft the bill refused to endorse the draft, maintaining that such a move contradicts the bills aim of curbing money laundering.

Legal circles had expected the proposed Foreign Exchange Management Act (Fema) to restrict itself to delineating foreign exchange transactions on the capital account, while the money laundering bill was expected to empower investigating agencies to come down heavily on white crime.

 

The exclusion of financial crimes from the draft bill has caused considerable heartburn among the representatives of investigating agencies on the committee.

The exclusion of financial crimes from the ambit of the bill has diluted it considerably. In fact, with the phasing out of the Foreign Exchange Regulation Act (Fera) the government will have virtually no power to pin down financial crimes. This is because the Foreign Exchange Management Act which is supposed to be the replacement for Fera, also has no provision to police financial crimes, said a member.

Committee members have already informed the finance ministry that certain issues contained within the bill need to be further debated since a consensus on them has not yet been reached.

The proposed bill puts the initial ceiling for launching investigations into possible money laundering at Rs 1 crore. Any bank deposit equal to or more than this amount will be investigated. However, the source of this money needs to be traced to criminal activities in order to become punishable under the law.

Financial misdemeanours such as over-invoicing of exports, under-invoicing of imports, income tax evasion, excise and custom duty evasion are not considered as criminal activities. Hence, money generated through these activities would not fall within the net of the proposed Act.

Economic offences constitute the majority of crimes committed in India. In fact, the amount of money being channelled through hawala is corroding the system of the country and this needs to be addressed through this Act, pointed out another committee member.

The first draft of the bill has listed drug offences (including peddling), kidnapping and illegal arms transaction as some of the crimes which come under the ambit of the proposed Money Laundering Act.

However, according to a report prepared by the Revenue Intelligence department which was placed before the committee, The maximum money laundering in the country is not done through drug trafficking or criminal activities but through under-invoicing and over-invoicing in foreign exchanges, misuse of the value-based advanced licence (Vabal) and quantity-based advance licence (Qbal) schemes and hawala operations.

The Money Laundering Act is supposed to replace certain provisions of the Foreign Exchange Regulation Act in keeping with international norms.

In most countries, foreign exchange violation is not considered an offence but stringent money laundering laws exist to arrest other kinds of financial crimes.