TOPICS : India to track foreign money

With Indians spending more money abroad and even picking up blue chip firms the government has decided to take a closer look at suspected money laundering activity and dubious international fund transfers. The cabinet of the ruling, centre-left United

Progressive Alliance (UPA) will shortly introduce a bill in parliament to amend the Prevention

of Money-Laundering Act making it mandatory for all financial intermediaries to report fund movements to an intelligence unit of the union finance ministry.

Last Thursday, soon after the introduction of the bill was approved, senior cabinet minister Priyaranjan Dasmunshi said it would “enable the government to meet certain domestic needs and international obligations,” referring to fund transfers that are likely to be related to criminal activity. Under the proposed new law, all agencies engaged in money transfers — such as Western Union, Visa and Mastercard — would have to compulsorily report all transactions. Existing law obligates only Indian agents of firms engaged in international transfer of funds through wire services to report transactions.

Covered by the proposed legislation are transactions involving credit cards besides earnings such as those made in casinos. There have been, in recent months, news reports of fund-transfers made through credit cards by persons suspected to have criminal backgrounds or engaging in under-invoicing of export bills. Most significantly, however, the amendment to the law comes in the wake of widespread concerns that the Indian government is not doing enough to bring back funds illegally taken out of the country and stashed away in secret accounts in banks located in tax havens. Till the 1990s, the Indian economy used to be a closed one and foreign currency transactions were strictly controlled. As the country’s economy liberalised and as the US dollar weakened, Indians felt less inclined to illegally park their money in foreign bank accounts, outside the scrutiny of government tax authorities. Nevertheless, analysts argue that slush funds continue to flow out of the country.

According to the Economic Times, India’s leading financial daily, illegal money coming into India in the garb of foreign direct investment (FDI) is now being closely watched by the Reserve Bank of India (RBI). The newspaper outlined the modus operandi of such transactions. Large amounts of money flow in, but only a tiny amount leaves the country. Investments are made in shell companies in tax havens to conceal the true identities of the owners of the funds.

These shell companies purchase shares of Indian companies at a hefty premium. The FDI comes in through an “automatic route’ and the Indian firm buys out the shell companies at a fraction of the price paid for purchasing its shares. Apart from the legislation the central Reserve Bank of India has asked all commercial banks (authorised dealers for foreign exchange transactions) to carry out checks on corporates investing in the country. — IPS