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Trade Based Money-Laundering: A Critical Analysis

SEPTEMBER 29, 2022

By L Venkateshwara Rao

TRADE-based money-laundering is one modus-operandi used by criminals to launder the ill-gotten monies acquired by commission of criminal activity relating to a scheduled offence (Proceeds of Crime) stashed abroad and bring it back to India in the guise of trade receipts through banking channels and project the same as untainted. In trade-based money laundering, criminals will employ several unlawful activities, such as preparing fabricated invoices, mis-declaring the description, quantity and value of import and export goods, abusing export promotion schemes etc. to circumvent customs and other tax violations and to launder the Proceeds of Crime. The aim of trade-based money laundering is not the movement of goods, but the movement of money. Trade-based money laundering thus seeks to legitimize the illegal origin of the "proceeds of crime" and to project the same as untainted. Professional money launderers will generally use trade-based money laundering techniques to launder the proceeds of crime for their customers for commission. Criminals involved in trade-related offences are usually the ultimate beneficiaries.

2) TECHNIQUES USED IN TRADE-BASED MONEY LAUNDERING (TBML): The following techniques are generally used by the criminals either independently or by mixing them in TBML.

(i) OVER AND UNDER-INVOICING OF GOODS AND SERVICES: Criminals mis-declare the price of the goods or service, in order to launder proceeds of crime.

Modus operand i: A criminal Mr. "X" has derived large amounts of money through sale of Narcotic Drugs (Proceeds of Crime) abroad. In order to launder these illegally obtained proceeds of crime and send the same to India, X floated several associate companies abroad and approached exporters in India to accomplish his motive. As per the mutually agreed arrangement, X got several Letters of Credits (L/C'S) opened in the name of his associate companies for the Indian Exporters for amounts much higher than the actual transaction value of the consignments being traded. Accordingly, X will get the trade documents prepared on the lines acceptable to the bank. The importer (associate company of X) will remit the inflated value of exports in terms of the L/C from the "proceeds of crime" of X lying with them to the Indian Exporter. The Indian exporter, after receiving the higher remittances retains the actual value of export goods and remits the remaining proceeds to the persons or the company suggested by X. Subsequently, the importing company abroad, will sell the goods locally and realizes valuable foreign currency. It is interesting to note that in majority of over-invoicing of export cases, the exporters do not claim any export incentives to avoid customs scrutiny and examination of the export cargo. Similarly, in cases of under-invoicing of imports, the difference between the "Actual Price" and the "Import Price" will be remitted from the proceeds of crime stashed abroad by Mr. X through his associate company to the foreign exporter on behalf of the importer. Subsequently, the Indian importer will pay the differential value in Indian rupees to the person or the company suggested by X in India. Thus, by adopting over-invoicing and under-invoicing activities, the money-launderers were able to bring the "Proceeds of Crime" to India in the guise of export proceeds through banking channels.

(ii) OVER AND UNDER-SHIPMENT OF GOODS AND SERVICES : This technique involves the mis-declaration of the quantity of import/export goods or services.

(iii) Mis-Declaration of the Quality OF GOODS AND SERVICES: This modus-operandi involves the mis-declaration of the quality or type of goods or services, such as shipment of relatively inexpensive goods, which are described as costly or expensive items [to bring inflated export proceeds (proceeds of crime) in the guise of export proceeds -noticed in over- invoicing of exports cases ], or an entirely different item, [often noticed in mis-declaration of description of imports cases-to bring a superior item and show low import cost and pay the differential price to the foreign supplier from the proceeds of crime stashed abroad] and to evade payment of applicable duties to Indian Customs.

(iv) ILLICIT CASH INTEGRATION : Criminals often search for ways and means to integrate illegally acquired monies into the financial system. The various methods, they adopt to accomplish the above desire would include inter-alia the following viz; Black Market Peso Exchange schemes, cooperation between criminals looking to dispose of illicit cash, the exploitation of surrogate shopping networks and the infiltration of legitimate supply chains.

(v) THIRD-PARTY INTERMEDIARIES: Criminals penetrate into the system by paying for the goods through the involvement of a previously unknown third-party in the transaction .

(vi) MULTIPLE INVOICING OF GOODS AND SERVICES: This modus operandi involves the reuse of existing documentation to justify multiple payments for the same shipment of goods or delivery of services.

(vii) Phantom Shipments - Purchase of high value goods using 'proceeds of crime', ship the goods and make re-sale of goods in the destination country.

viii) Over Valuation of Imports: 'Project imports" made for 'initial setting up' of an ULTRA MEGA POWER PROJECT which are leviable to low or no duty, can be used as a channel to park foreign currency abroad. These goods are normally procured through a middleman (supplier) abroad. After receiving the foreign currency from the importer, the supplier will pay the agreed price to the manufacturer and "park" the remaining amount on behalf of the importer abroad. The stashed foreign currency can be used for purchasing assets like a coal mine in the name of importers associate/ benami company abroad with the help of the supplier and the associate/ benami company of the importer subsequently sells coal to the same importer at reduced price or pay the difference between the actual price and the import price of another import consignment

Further, through the above modus operandi, the importers will manipulate the price of electricity to be supplied by them to the State Government also. The private power plant owners/Developers are required to enter into a Power Purchasing Agreement (PPA's) with the respective State Governments. As per these agreements, the power plant owners are required to sell a specified percentage of power to the State Government at concessional rate. For example, in case, the power plant is selling one unit @ Rs 5 per unit to others, it is required to sell at Rs.3 per unit to State Government for providing land and other infrastructure facilities at concessional rate. In all these cases, the owner will determine manufacturing cost of one unit of power taking into account, the over-invoiced or the inflated price of imports and will inflate the cost price of one unit of power and demand higher tariff rate per unit from the State Government showing inflated manufacturing cost. In this way, they can cheat the State Government also.

(ix) Abuse of Replenishment of gold for export of gold jewelry scheme: Import of gold and silver is restricted and nominated agencies certified by the RBI alone can import them. A company "X" imported gold without payment of duty for supply to Y, a, jewelry exporter (gold imported without payment of duty can be sold to jewelry exporters for usage in the manufacture of jewelry items for export) under the Foreign Trade Policy.

Modus Operandi Noticed : Investigations revealed that Y was procuring gold duty free from several agencies and getting them converted into jewelry from their job worker Z and were exporting the said jewelry under Replenishment Scheme. It is also revealed that in most of the consignments, M/s Y were declaring the export item as "0.916 purity fully mechanized plain gold jewelry. However, investigations revealed that the company Y has exported only "plain Kadas" without involving any mechanical process. They also failed to meet the prescribed value addition of 3.5% to enable them to import and procured the gold duty free. In the process, the company Y allegedly evaded the applicable customs duty on the gold procured from company X and also diverted part of the gold. It was also noticed that the exported "Kadas" were manmade and M/s Y showed some gold as wastages. However, there was no wastage of gold since they exported "Kadas", without involving mechanical process. The investigators came to know about the connivance of company X with Y in supply of gold duty free subsequently.

(x) Abuse of Free Trade Agreements: Many gold importers have exploited the zero-duty exemption under India's Free Trade Agreements (FTAs) entered with several countries including South Korea. India signed FTA and Comprehensive Economic Partnership (CEP) and as per the same, gold can be imported without paying the 10 per cent customs duty, as the 12.5 per cent countervailing duty has been subsumed in the Goods and Services Tax (GST), which is 3 per cent for gold. Accordingly, importers imported gold coins as they offer a greater scope for over-invoicing than gold bars from countries like South Korea, and through over-invoicing, they are able to send extra dollars out of the country illegally.

Modus operandi: An importer registers an exporting company in Korea and sourced gold coins from the Indian importing companies at UAE, Hong Kong or Singapore. The cost of minting a coin is about 0.3 per cent, and the manufacturer adds a markup of say 1.5-2 per cent to that while making an invoice for the Indian importer's Korea- registered company. The exporting firm then ships the gold coins to its Indian sister company by adding another 1-2 per cent. As the opportunity to price the exporting gold is very wide, given the 10 per cent duty differential for bullion imports, it is easy for the Indian importer to over-invoice and make the payment officially through a valid banking channel.

3. Apart from helping the criminals to bring back the Proceeds of Crime stashed abroad to India through banking channels as legally earned money and untainted, trade-based money-laundering offers several benefits to the exporter, importer and the middle-men or the commission agent. These benefits would include - new exporters can have pre- arranged importers for their goods and services and can save expenditure or costs towards opening of Letters of Credit (L/Cs) as this task is already being undertaken by the associate companies of the Criminals. Further, they can improve their export performance with the inflated export values for their consignments and can achieve the status of "EXPORT HOUSE" quickly which will fetch them further benefits like facilitation of their import-export cargo by the R.M.S and waiver of execution of sureties in the form of Bank Guarantees for their import consignments etc. The importers in other countries will gain by receiving goods and services as full or part payment for Narcotics. The difference between the actual cost and the invoiced price of the consignment (part of the proceeds of crime) will be transferred to the select destination/person of the criminal. Finally, the agent gets his commission.

4. Keeping the above-mentioned techniques in view, the customs and other tax collecting authorities should keep a watch on (a) movement of large sums of money in the accounts of companies/firms or individuals which do not appear to be relatable to their business,(b) export remittances received from third parties, (c) over-valuation of export goods and (d) request of exporters to include certain parties or companies as "notify parties" in trade documents without proper justification and without adequate explanation.

5. Considering the exponential growth in the volumes of proceeds of crime being laundered annually through various channels including customs channel, it is desirable to know and assess the various functions of customs department and its preparedness to detect and conduct preliminary investigation of money laundering offences.

The Central Board of Indirect Taxes (CBIC) administers Customs and GST Acts. The authorities working under its umbrella collect customs duties and GST and also has the ancillary functions of anti-Evasion and Prevention of Smuggling activities. As the primary function of the department is tax collection, the departmental officers will focus more on tax collection and investigation of tax evasion offences. Two premier directorates viz; Directorate of Revenue Intelligence (D.R.I) and D.G.G.I are functioning under the arm of CBIC to investigate cases such as - customs duty evasion, gold smuggling, Narcotics offences, FICN, GST evasion and GST frauds etc. Since the exporter aiding the money- laundering through over-invoicing of exports do not generally claim export incentives, normally all such export consignments will be facilitated by the Risk Management System (R.M.S) and the system will waive assessment and examination by the customs authorities for such consignments. Thus, the facility which was meant for genuine exporters is being abused by money-launderers.

6. As discussed in the foregoing paras, TBML essentially takes place through import-export route. Since the said work is being attended by the customs officials, it is desirable that they should possess adequate knowledge of Money-Laundering Laws and procedures. This knowledge will help them for detection of money-laundering offences, conduct preliminary investigation and hand over the case for further investigation to E.D officials. The same principle would apply to the officers working in the DRI, DGGI and GST also as these officers are transferrable from one formation to the other within the CBIC. Considering the exponential growth of money-laundering offences in the present times, it would be prudent for the CBIC to impart suitable training to the officers working under its umbrella enabling them to detect, conduct preliminary investigation of money-laundering offences and render assistance to the E.D officials as and when required.

[The Author is Commissioner of Customs & Indirect Taxes (Retd) and the views expressed are strictly personal.]

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