Two recent events indicate that the turbulent trade times are likely to turn into a more terrible nightmare. India’s Enforcement Directorate (ED) convinced the international Interpol to issue a purple notice on a new trade-related modus operandi to launder money, and remit it legally through banking and corporate channels. At the same time, the investigating agency arrested Amit Aggarwal who, it claims, is the mastermind of an elaborate system to transfer illegal money to financial hubs like Singapore and Hong Kong.
As old trade routes are disrupted, and new ones sculpted, there is enough wiggle room for the criminals and dishonest to benefit from the confusion and chaos. As nations use smuggling and illegal routes to further their national interests, especially in the trade of crude oil and petrochemicals, the shades of global trade are becoming gray, rather than white and black. It is difficult to distinguish what is right and wrong, or what is official and unofficial. The officials encourage unofficial mechanisms, and the unofficial use official channels.
Let us consider the purple notice. According to an official press release, “In this case, ED’s probe revealed an organised network of domestic and foreign shell entities engaged in large-scale laundering of funds under the guise of international trade. The conspirators exploited trade mechanisms and banking channels by under-invoicing imports, using sham duty-free imports (such as semiconductors), forging compliance documents, and carrying out circular re-exports through third-country entities to disguise illicit remittances. The circular trading created a false narrative of international commerce, masking large-scale laundering of funds. The scheme exhibited hawala-like features but operated through formal banking systems, shell companies and forged trade documentation to evade regulatory detection.”
Essentially, in simple words, there may be a two-way movement of money, a combination of both. In one journey, black money generated in India is pushed into Indian banks by bribing bankers and chartered accountants. Sham import deals are inked between shell entities in India and other nations. This implies that either the imported products never arrive, or some junk comes in, which is thrown into the sea. Money is paid via the Indian banks to the foreign sellers. Black rupees turn into white dollars, pounds or euros.
The use of the phrase “duty-free” embedded between the words, “sham” and “imports,” in the ED’s press release is crucial. If the Indian buyers pay duty on their purchases, they will essentially pay a tax to the Government to convert black into white. It is akin to commissions paid to hawala operators, who receive money in one location, and pay it in another one. Duty-free imports allow the buyers to escape such legit and illegal taxes. The entire amount is safely transferred through proper banking channels.
Aggarwal’s arrest proves this leg of the money-laundering journey. He and his team bribed bankers, who opened bank accounts to allow deposits of cash. Over time, when the money became substantial, it was used to pay for non-existent duty-free imports to related and connected parties in Singapore and Hong Kong. According to ED’s estimate, nearly `700 crore flew away in this manner. In this case, the imported goods never arrived in India. They were only on paper. An official trail to confound the regulators and investigators.
Now, look at the second leg of the journey, as described in the purple notice, which relates to exports. If the original Indian importers wish to get their money back into the country in legal form, they need to add value to the imports and export them. But selling the goods to the same parties, or related parties, in the importing nations may alert the investigators. Thus, the exports are made to a third nation, from where they hop and skip through other countries.
Finally, the exported goods reach the destination country, where money is already parked as payments for the original imports. This is why the ED’s circular uses the phrase “circular re-exports through third-country entities.” Circular trading is common in stocks to manipulate and inflate the prices. In global trade, though, it is used to receive the money. Now the money starts to flow in the reverse, through the same exporting nations, and back into India. The black money holder has not only washed the money, but has received it back as white. She can now use it openly and publicly.
The same journey can happen in reverse. Goods are exported through several entities and nations to receive money from the destination nation, where the exporter has stashed illegal proceeds. The money comes back as legal receipts. In the case of goods, exports are exempted from tax. The services sector enjoys the same with specific attached criteria. Now the same white money can be sent abroad as payments for sham imports. It can be parked anywhere in the world, and its identity does not need to be hidden. It is legal earnings.
Sounds complex. Of course it is. “Money laundering is a complex process that usually involves trans-border elements and effects. Thus, any legal strategy that is to deal with this common and global problem needs to have a significant international dimension and coordination. Informal cooperation, i.e., cooperation through informal channels, is a key area to trace/identify the assets, and gathering the information for the ongoing investigations. Timely and precise gathering of information through informal cooperation is vital to effective domestic investigation,” states the ED’s press release.
Sadly, this is not happening. A few days ago, two separate benches of the Supreme Court lambasted ED for tardy and delayed investigations, as well as “poor conviction rates.” One of them, which was headed by the chief justice, stated that while the ED successfully incarcerates alleged criminals, there are no convictions. The other bench provided the numbers: Of the 400 registered cases, only 10 have reached the conviction stage. As one of the judges commented, “People are in custody for four to five years, and finally acquitted.”
The Government blames the influential accused, who hamper the work of the “poor investigators.” The former park themselves abroad, and their money is stashed away in tax havens. They delay trials by filing applications, and do not allow them to start. While this may be true, and there are other challenges, as highlighted in the ED’s press release, the need of the day is better investigations, and a cadre of special judges who understand the money-laundering intricacies.