Mumbai/New Delhi: After demonetisation of high-value banknotes, the Enforcement Directorate (ED) conducted 620 searches between November 2016 and September 2017 on suspicion of violation of foreign exchange rules, and money laundering, the agency said in a report on Thursday.
ED said it had issued 597 showcause notices involving violations of the Foreign Exchange Management Act (FEMA) to the tune of Rs4,600 crore. The agency provisionally attached Rs5,335 crore of assets for suspected violations of the Prevention of Money Laundering Act (PMLA).
On 8 November last year, the Indian government banned Rs500 and Rs1,000 banknotes in what Prime Minister Narendra Modi described as an attack on black money, or unaccounted and untaxed wealth, counterfeit notes and terror finance networks.
The ED report said financial institutions, namely banks, were the most susceptible to money laundering, accounting for 48% of the FEMA and PMLA cases, followed by real estate at 35% and gold or precious metal at 7%.
“The proceeds of crime are laundered mainly through financial institutions using shell companies and real estate. It is worth mentioning that even in real estate sector, the money for investments has been coming through financial institutions using a maze of shell companies," said the report.
Financial institutions, being the biggest money-moving channels, are typically more susceptible to fraud, Samir Paranjape, partner and head of forensic and investigative practice at Grant Thornton India, said.
“However, post the demonetisation exercise the banking channels came under tremendous stress so any data should be seen in light of this fact," he added.
Despite the Reserve Bank of India issuing guidelines on cyber security for financial institutions in India, experts said these institutions had become vulnerable to cyber crime, especially in the post-demonetisation era, simultaneously stressing the need for an appropriate cyber resilience policy.
“The post-demonetisation era saw the absence of any deterrent by way of legal provision for white collar crimes. Today, the Indian information technology law goes soft on such cyber crimes, especially after the 2008 amendment (to the Information Technology Act), because these offences are bailable. This means that a person is free to come out and delete evidence," said Pavan Duggal, a cyber law expert at the Supreme Court.
The ED found that six broad avenues were used to convert black money into white: bribing bank officials, using shell companies, investing in gold bullion and jewellery, advance remittances against imports, investing in foreign currency and investment in real estate.
“In most of the cases in the above modus operandi use of shell companies was an important common factor. And therefore a task force was set up by the government of India on shell companies," said the ED in the report.
The ministry of corporate affairs, or MCA, in September had struck of 200,000 companies from the records of Registrar of Companies (RoC) on the allegation that these are shell companies.
This is how shell companies are used for money laundering. Shell companies are used to receive cash from the beneficiaries. Later the money is routed through a web of companies formed by the operator for layering. The money is finally in the form of banking transactions is transferred to the beneficiaries.
“The operation involves beneficiary account and benefactor account, one that needs cash in lieu of cheque i.e. entities wanting to siphon off funds in the grab of expenses and the others who need cheques in lieu of cash," said the ED in its report.
Illegal foreign exchange remittances or trade based money laundering involves remitting foreign exchange in the guise of advance remittance for import of goods by some shell companies.
“The use of fake bills of entry/inflated bills of entry for transfer of funds from India to countries like Hong Kong and Dubai is very common," said ED.