Money Laundering – an advice to Bankers

On Sunday, i.e, 11th September, 2015, all newspapers were flush with the news of Central Bureau of Investigation  and Enforcement Directorate raids at some of the  branches of Bank of Baroda and many other private properties. The reason:-  around Rs 6172 crore were sent from India to Hong  Kong as advance remittances for import of cashews, pulses and rice, but nothing was imported and most of the firms remitting money from Ashok Vihar branch of BOB were alleged to be fictitious. The ED has registered a case under sections of Prevention of Money Laundering Act. 

The interesting aspect in this entire game  is that the institution (Bank of Baroda) do not suffer any financial loss (except reputational loss), rather it profited by way of earning on commissions on such remittances. But its employees will suffer financial, physical, mental and all types of loses. The reason is simple-- banking is not like any other industry wherein loss is suffered only by the promoters but  in banks, since raw material is public money, it  becomes an onerous task for bankers to upkeep the  public trust. 

Let's understand how banks are used for money laundering.  As per newspapers reports, in present instance, irregular transactions were conducted by splitting large transactions into several smaller ones below $ 100,000 to avoid reporting (FEMA allows up to $ 100,000 remittance for imports without a Bill of Entry).  Such structuring of transactions to avoid reporting to regulatory or tax authorities is termed as 'structuring' or 'smurfing' in banking circles. 

According to the United States Treasury Department, "Money Laundering is the process of making illegally gained proceeds (i.e. "Dirty money") appear legal (i.e. "Clean")." 

Typically, it involves three steps: placement, layering and integration. First, cash is introduced into the financial system by some means ("placement"). Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts ("layering"). Final step involves integrating this money into the financial system through additional transactions until the "dirty money" appear "clean". 

In this entire complex mechanism, there is generally one link which is fictitious. The real culprit deliberately keeps this fictitious link to avoid being caught. In such situation, it becomes the utmost duty of bankers to scrupulously comply with Know Your Customer ("KYC") guidelines. 

Secondly, relaxations  given by the government are to facilitate growth. Bankers should use their general prudence that no one misuses the system. If imports up to $ 100,000 are exempted from submission of Bill of Entry or other documents, bankers must ensure from other means that imports have actually happened.

For banks,  system compliance  is equally important as growth.

(The views expressed in the article are merely for academic purpose and are not subscribed by the organisation where the author is working)

 Tilak Gulati,  Assistant General Manager, UCO Bank. 

Author: www.itstrgulati.blogspot.in