ANTI-MONEY LAUNDERING POLICY REFORMS: INDIAN INCOME TAX MANAGEMENT STRATEGY IN A GLOBALISED ENVIRONMENT

Presentation of policy paper in the sixth Annual International conference on Public Policy and Management

By Biswaranjan Sasmal PGPPM 2011-13 IIM Bangalore

(Views expressed are personal and academic.)

PRESENTATION OUTLINE
What is Money Laundering Policy Context & Concern The Policy Gap : Laundering of Red Money through IT Dept Policy answer from US IRS Recommendations for Policy Reforms Summary & Conclusion.

What Money Laundering is

Laundering means investment or other transfer of money flowing from racketing, corruption, drug transactions and other illegal sources into legitimate channels so that its original source cannot be traced. The meaning of Money Laundering (ML) is the washing of dirty money to make it appear to be legitimate. Simply stated, the process of money laundering implies cleansing of money earned through illegal activities like corruption, extortion, drug trafficking, gun running, human trafficking, illegal mining etc. The metaphorical "cleaning of money" with regard to appearances in law, is the practice of engaging in specific financial transactions in order to conceal the identity, source and / or destination of money.

What Money Laundering is

In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today, its scope is often expanded to encompass any financial transaction which generates an asset or a value as the result of an illegal act. Hence, the illegal activity of money laundering is now recognized as potentially practiced by individuals, businesses, members of organized crime (such as drug dealers or the Mafia) etc., through a complex network of shell companies based inside and in offshore tax havens. In India Money Laundering activities can be notionally regarded as Red Money referring to Illegal Money generated from criminal activities. The deeper Red money" gets into the international and national economic system, the more difficult it is to identify its origin.

What Money Laundering is

Because of the clandestine nature of money laundering, it is difficult to estimate the total amount of money that goes through the laundering cycle. Estimates of the amount of money laundered globally have ranged between $859 billion and $1.5 trillion in a year. Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem. Global Financial Integrity estimates; between 1948-2008, the illicit assets of India laundered inside was $178b(27.8%) and illicit assets held overseas was $462b(72.2%)

The Policy Context & Concern

Income tax provisions in IT Act 1961 & new Direct Tax (DT) Code 2012 do not distinguish legal and illegal source of income and evidences indicate laundering of illegal money is done by payment of taxes @ o% 35%. The growth rate in Direct Tax Collection in the last 10 years are abnormal and disproportionate to the GDP growth rate. Income tax department (ITD) and IRS in India has no role, jurisdiction and authority in Anti-Money Laundering initiatives. Lack of such authority and role for the ITD & IRS is a serious National and Global concern. During June 2009 to Jan 2011 the ITD through focused search operations detected tax evasion of $3.19 billion, its directorate of transfer pricing detected mispricing of $7.18 billion. But no case investigated by the ITD for money laundering or currency violations.

Policy Context & Concern.

March 2011: Supreme court of India questioned Why the source of Illegal money in the case of Hassan Ali Khan was not investigated by the ITD , & why Money laundering charges were not investigated? Most tax offences under IT Act are non-cognizable. Duration of criminal trials for tax offences on an average run for 13 years and mostly ends up in acquittals. In India Tax Evasion from legal as well as from illegal source is not included in the list of Predicate offences in the Prevention of Money Laundering Act (PMLA) 2002 Provisions of the PML Act 2002 and IT Act/ DT code, are at loggerhead. Money laundering conviction rate in India is zero.

Laundering of Red Money through ITD!!!

Provisions of the IT Act & DT Code, Strategy & Practices of the IT Department are focused on the Tax Evasion and Black Money. Its Strategy does not target Red Money generated from illegal source. The IT Act has not yet incorporated AML provisions, even after the enactment of Prevention of Money Laundering Act 2002 and and its subsequent amendment . Provisions of the IT Act are at loggerhead with the PMLA. Provisions in Section 68 & 69 of the IT Act provides direct scope for laundering of illegal money by payment of Direct Tax. Recent high profile corruption cases and its investigations indicate large scale laundering of illicit money through ITD. Illicit money of Indians kept in various banks in tax heavens are currently laundered by voluntary payment of income taxes in India.

Search for Policy Answer from US IRS

Study of Anti-Money Laundering strategies adopted by the Revenue Services of various countries undertaken to find the policy answer for Indian Revenue. Study of the AML strategies of the US IRS, conducted during November 2011 in collaboration with the Maxwell School of the Syracuse University . The Mission and strategy of the US IRS Criminal Investigation (CI) : To generate maximum deterrent effect, enhance voluntary compliance, and promote public confidence in the tax systemby investigating potential criminal violations of the Internal Revenue Code and related financial crimes of Tax evasion , Money Laundering and currency crime violations . The strategic plan of US IRS CI: Three interdependent programs: Legal Source Tax Crimes ,Illegal Source Financial Crimes, and Narcotics Related Financial Crimes.

...Policy Answer from US IRS CI

US IRS CI has statutory and executive authority over Tax, Money Laundering and currency violations and plays pivotal role in the Prevention , Enforcement , Investigation and prosecution of all such crimes. Proactive and effective utilization of all statutes within CIs jurisdiction, enforcement techniques and the grand jury process. US IRS CIs conviction rate for Money Laundering prosecutions has been above 75%. Several UBS clients pleaded guilty of filing false tax returns and agreed to pay millions to the U.S. Treasury Department in 2010 and 2011. The investigation of the US IRS CI and DOJ has made Switzerland for a global settlement of offshore tax evasion which is under active consideration of Swiss Parliament

Recommendations for Policy Reforms

To Make Tax, ML and currency violations untenable in terms of economic viability & criminal risk by developing AML policy and strategies in the ITD. The core of strategy: Certainty and time bound punishment. To bring statutory jurisdiction, authority and executive mandate for ITD for ML investigation, similar to US IRS CIs authority under Internal Revenue code , Title 26, Form 8300, Title 31 USC 5331,5332, Title 18 USC 1960, Bank secrecy Act, Money Laundering Control Act ,Asset forfeiture statute and most important Title 18 USC 1956 & 1957. Include all tax crimes and particularly tax crimes of illegal source Red Money, a predicate offence for money laundering in the PMLA 2002. Develop similar program of Illegal Source Financial Crimes Program for IRS DCI in India. Implement Malimath committee (2003) report of Govt of India on reforms of criminal justice system for all Financial crimes.

Recommendations for Policy Reforms

To establish layers of reporting, monitoring , sharing, collaboration, enforcement, and investigation protocol by IRS DCI to outmatch the innovation & techniques of Tax evaders and money launderers. To bring in similar stringency in monitoring and reporting cash and suspicious activity transactions as practiced in the USA. To develop special monitoring and risk assessment mechanism for all the Politically Exposed Persons (PEPs) as followed by the US IRS CI. Formation of AML joint task force and collaboration with all law enforcement and regulatory agencies. Key role for IRS CI in all the financial crimes investigation. Introduce asset forfeiture & confiscation of illegal source money. Strategic use of Asset Forfeiture fund for financial support for AML joint task force as practiced successfully in the US IRS CI. Global collaboration and AML capacity building.

Good News on Policy Reforms

In response to various PLI by the civil societies and as a result of the initiative of the Supreme Court, Reforms initiated in April 2011. Reform initiatives include Joining global crusade against black money , Creating appropriate legislative framework, Setting up institutions for dealing with illicit funds , Developing system for implementation, and Imparting skills to the manpower for effective action. In May 2011 Department of Criminal Investigation (DCI) has been set up in the ITD for initiating Anti-Money Laundering Policies against the Illegal source money. Indian IRS DCI during 3rd week of Nov 2011 has visited US IRS CI to draw reference points for developing AML strategies in the ITD.

Summary & Conclusion

Operative strategy in the ITD to combat ML would be to increase the cost of Money Laundering activities until they become untenable, both in terms of economic viability and criminal risk quotient. Though it would be easy to anticipate many objections to the above study and inferences, however we live in a world of second best, wherein it would be difficult to find a solution that met all the objections. The alternative of ignoring the problem may become more costly and damaging to the Government, Economy and the Society as a whole.

End Note
Law should not sit limply, while those who defy it go free and those who seek its protection lose hope -Jennison v. Baker,(1972), 1 All E.R.997-

THANK YOU

Annexures

Effective Prosecution Of Money Laundering Violations By The US IRS CI

Money Laundering Investigations Investigations Initiated Prosecution Recommendations Indictments/In formations Sentenced Incarceration Rate* Average Months to Serve Bank Secrecy Act (BSA) Investigations Investigations Initiated Prosecution Recommendations Indictments/In formations Sentenced Incarceration Rate* Average Months to Serve FY 2011 795 518 462 344 75.30% 33 FY 2011 1726 1383 1228 678 86.10% 70 FY 2010 1597 1240 1066 751 83.80% 69 FY 2009 1341 1048 936 753 85.90% 72

FY 2010 738 456 380 299 73.90% 38

FY 2009 624 343 289 335 75.50% 39

Data Source: Criminal Investigation Management Information System accessed via http://www.irs.gov

Indias Money Laundering Conviction Statistics

Indicator # Investigations # Persons arrested # Prosecutions filed # Convictions

2006-07 27 7 -

2007-08 15 -

2008-09 17 2 -

2009-10 739 9 4 -

Total 798 16 6 -

Source: The Financial Action Task Force, India Evaluation Report June 2010 ,Accessed via: www.fatf-gafi.org

Indian Income Tax Provisions at Loggerhead with Anti-money Laundering Provisions

Section 68 of IT Act 1961 :Cash credits: Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous years. Section 69 of IT Act 1961 :Unexplained investments: Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

Direct Tax GDP Ratio

Source : Director Budget (CBDT)

Direct Tax GDP Ratio

Source : Director Budget (CBDT)