India's sweeping anti money laundering agenda comes under scrutiny


Money laundering and abuse of sophisticated financial instruments have come under increasing scrutiny from regulators. However observers warn high-profile initiatives often act as a distraction from a lack of genuine political will to tackle global financial crime.

For example, India’s leading stock exchange, the BSE, de-listed 222 dormant shell companies on July 3, as part of its government’s much-touted crackdown on “black money”.

It is the latest move in Prime Minister Narendra Modi’s long-term pledge to crack down on organized crime, and follows moves from regulators in the UK and elsewhere to try to reduce use of anonymous or inactive financial vehicles to hide the origin of criminally-acquired wealth.

Experts told WikiTribune that these shell companies have long played a key role in global money laundering, but bouts of activity such as this rarely indicate comprehensive action.

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Shell companies as facilitators

Modi took office as prime minister of India in 2014 with a vow to crack down on corruption and “black money” — effectively promising to tighten up the country’s financial system so it would be harder for criminal organizations to do business.

In November 2016, Modi abruptly abolished 500 and 1,000 rupee bank notes, which regulators said were used to facilitate crime and terrorism. Soon after, authorities noticed a surge in foreign and domestic shell companies depositing money in banks.

In some jurisdictions these companies do not require a named owner or director; in many, they are set up with named directors who have little connection to the source of wealth, and can therefore be used to move money without revealing its source.

Indian regulators including its Securities and Exchange Commission have since gone to great lengths to remove this risk. In July last year, the SEC ordered the closure of 200,000 companies and started examining the activity of thousands more.

Shell companies are often associated with offshore financial centers such as the Seychelles, British Virgin Islands (BVI) and Jersey, but their use is global. The UK’s offshore centers, with London’s stock exchange and financial services sector as a hub, rely to an extent on having a reputation as a secure and sensibly-regulated place to do business.

In Global Shell Games, a book published in 2014, academics found that the U.S. was the easiest jurisdiction to set up a shell company, while many offshore centers had more rigorous registration requirements.

On May 1, the British government approved legislation to compel its overseas territories to adopt stricter business registration standards. This extends legislation that had scheduled the launch of a register of beneficial ownership for UK companies by 2021, and contains similar requirements to the EU’s Fifth Anti-Money Laundering Directive, approved by the European Parliament in April.

Anti-corruption activists welcomed what they saw as a key step in closing the loopholes used to launder illicitly acquired wealth, but regulators in Britain’s overseas territories objected to the unwelcome imposition of rules from Westminster. Governments in several offshore centers signalled reluctance to comply with the new requirements and risk losing their reputations as facilitators of the global financial system.

Need for real political will

India’s action on shell companies is a “positive step” said Gary Youinou, founder of anti money laundering (AML) advisory Know Your Country, but “it also highlights the lack of regulatory control and effectiveness that has existed at the BSE [Bombay Stock Exchange] for many years and has allowed these shell companies to operate in the first place.”

A man ties a balloon to the horns of a bull statue at the entrance of the Bombay Stock Exchange (BSE) in Mumbai, India April 26, 2017. REUTERS/Shailesh Andrade/File Photo
A man ties a balloon to the horns of a bull statue at the entrance of the Bombay Stock Exchange (BSE) in Mumbai, India April 26, 2017. REUTERS/Shailesh Andrade/File Photo

The 2015 crackdown on cash would have affected the cash-reliance, in both legitimate and illegitimate businesses, of poorer Indians. Cracking down on the use of shell companies is likely to prevent money laundering higher up the chain, Youinou said, but he was skeptical as to whether it is part of a coherent strategy.

“It will be interesting to see the appetite of the Indian authorities to chase down those who may have illegally evaded taxes, especially when the Indian judicial system moves so slowly, and corruption is still a major issue,” he said.

Ron Pol, a political scientist and anti money laundering expert, told WikiTribune  “‘cracking down’ on shell companies sounds like a smart move. But, people might like to ask whether the authorities’ actions are little more than a shell game itself.”

Pol has written and researched the AML industry for years and suggests the narrative of progress promoted by AML experts is contradicted by statistics showing that less than one percent of criminal wealth is clawed back by authorities.

New Zealand abolished a specialized form of shell company in 2017. At one stage, there were more than 12,000 “offshore” or “foreign” trusts registered in New Zealand, often with local lawyers and accountants named as trustees. An inquiry recognized they were likely used by organized criminals as well as for legitimate purposes. In essence, they “allowed non-New Zealanders to use the country’s specialist secrecy vehicle like an ‘invisibility cloak’ – shielding assets from prying eyes,” according to Pol.

“No-one knows the real value of criminal assets shielded behind New Zealand’s offshore trusts. Because no-one bothered to look. It might have been trillions of dollars. Given the scale of a few cases that are known (eg here and here), it was likely at least some hundreds of billions of dollars,” said Pol, via email.

Most of New Zealand’s offshore trusts were shut down over the course of a year, but authorities did not recover any illicit money or scrutinize the companies to find evidence of wrongdoing.

New Zealand’s experience is one that highlights the political and practical challenges regulators come up against when trying to rein in part of the corporate world that is used across borders, and for both legitimate and illegal purposes.

Pol added that “any evidence of wrongdoing, and the money trails leading to criminal assets and illicit funds, will now be even more difficult to trace, if not impossible.” Likewise, the country’s potential share of the proceeds of confiscated criminal assets, and New Zealand’s opportunity to strike a blow against serious organised crime all but evaporated with the secrecy vehicles.

“If countries really want to have an impact on crime, they need to follow the money, and close down not just the shell company façade, but also the criminal enterprises using shell companies to conduct businesses like drugs-trafficking, human-trafficking, sexual exploitation, corruption and tax evasion,” said Pol.

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