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The enduring business of money laundering

The enduring business of money laundering
Highlights

When chips were down Mr Vijay Mallya chose to flee to London and Mr Nirav Modi to Hong Kong and from there to London It is no secret the corrupt and...

When chips were down Mr Vijay Mallya chose to flee to London and Mr Nirav Modi to Hong Kong and from there to London. It is no secret the corrupt and the rich from Indonesia settle down in Singapore once things become hot in their native country. When we were young, we only heard about the Swiss banks and the secret accounts that were maintained there by the rich and famous from around the world.

Today a number of other cities are competing with Switzerland as safe havens for parking the illicit money and also as centres of money laundering back into the native country if the prospects are good and the returns are attractive. Of course, there is no compulsion to bring it back to the native country once the dirty money is washed and converted into clean and neat assets for use anywhere in the world as required. Are these new safe havens of illicit money representing the new face of imperialism giving shelter to the financial criminals from other countries and to that extent facilitate exploitation of resources in those countries?

Out of the five to six important safe centres for parking ill-gotten money and for engaging in money laundering three happen to be City States or centres like Singapore, Dubai and Hong Kong. This illegal activity is of importance to these small states for their economy and hence they will go all out to make it comfortable for these lawbreakers to get their money to these centres, park it there with all secrecy and launder it around the world as required. Countries like England are no exception and have ensured that the legal system is so structured to give the maximum protection to such persons who back in their home country are regarded as financial criminals. Hence London becomes the destination of choice for such fugitives once chips are down in their native country.

As per an estimate by IMF around two to five per cent of world GDP is laundered. In simple terms money laundering is nothing but what we call as conversion of black money to white. Illegally obtained money is made to appear as if it originated from a legitimate source. The drug traffickers, the corrupt politicians and bureaucrats and industrialists who generate ill gotten money get it converted to legitimate money through the process of money laundering.

Over invoicing of imports and under invoicing of exports is the most common way for most of the industrialists to generate ill gotten money for laundering. Money laundering consists of three stages of placement layering and integration. In the first stage, ill-gotten funds are introduced in the financial system and in the second stage ownership and source are made legitimate and in the final integration stage the same is introduced into the legitimate economy.

Mauritius route is a perfect example of money laundering with reference to India and is facilitated by the Indian government itself by a trade treaty which works as a smokescreen for money laundering. Any company in Mauritius having a name, office phone number is eligible to invest in India via Mauritius route. Ill-gotten money is physically transferred to Mauritius and is shown as profits derived by a company set up there and after paying one per cent income tax it becomes legitimate for investment back in the stock market in India.

Since long term capital gains is zero in India after the same is held in shares for a period of one year it can then be claimed as legitimate tax free. Mr Chidambaram who as finance minister is the architect of this Mauritius route also looks to be a beneficiary of the system as a case is now made out against him for money laundering and chargesheet filed.

One person conversant with this process told me once that starting an airline is the most attractive way for money laundering. No wonder all the big and mighty against whom cases are now being investigated have at one time or the other are involved in running airlines which finally became loss making. Maybe once the process of money laundering is completed the business has no value.

Of course, there are different methods for conversion in different tax havens but broadly the modus operandi remains the same. The oligarchies in the native country where the ill-gotten money is generated and the tax havens where it gets converted and money laundering centres where it gets parked are all beneficiaries of this financial transaction and have a vested interest in sustaining it. Nobody wants to kill the golden goose which is beneficial to all of them but of course not so beneficial to the native country where this ill-gotten money is generated most of the time plundering the natural resources in an arbitrary manner and made available to the world tax -free.

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