Black money has always been part of the Indian societal narrative, especially when it comes to discussions on the ills faced by the country — from the 60s and 70s when movies started incorporating gold smugglers, drug traffickers and seedy businessmen, to the current day where the enormity of this problem has become so apparent in popular discourse that even an economic shock like demonetisation is backed with popular support.
Anti-money laundering movesFor money launderers, the most effective way of siphoning black money is through banks and financial institutions.
India has taken the lead in a number of Anti-Money Laundering (AML) compliance initiatives within the sub-continent and the developing world.
In order to get a thorough understanding of AML compliance in India, we started researching money laundering convictions and penalties globally.
For starters, the RBI, which is the regulator empowered with taking actions on banks, is the third most active regulator. With 307 AML actions since the year 2000, it comes ahead of the developed world, with the exception of the US and the UK.
Research shows that 95 per cent of actions by the RBI have happened within the last six years. The Enforcement Directorate (ED) has been able to detect ₹9,000 crore of money laundering but it wasn’t until January this year when the first conviction under the Prevention of Money Laundering Act, 2000 (PMLA) took place.
A report by Global Financial Integrity has estimated the illicit outflow of money from India at $505 billion during 2004-13. Though the government hasn’t acknowledged this, there have been repeated allegations of tax evaders, criminals and even politicians being complicit in this ‘flight of cash’ to tax havens.
The answer to this malaise lies in a dynamic and comprehensive anti-money laundering framework offering positive and negative motivations. Simplifying tax norms, incentives for tax compliance etc. are a component of positive motivation.
With regard to negative motivation, the RBI has been penalising banks for AML failures. In 98 per cent of the cases, banks have been penalised, not primarily due to money laundering but due to weaknesses in AML compliance programs.
Penalties should be harshWhat is worrying is the size of the penalties, which is one of the lowest by average globally. The US has witnessed penalties of $21.8 billion over 991 AML actions. India has witnessed one-third of the action with total penalties being only $20.7 million. In comparison, BNP Paribas had to shell out $8.9 billion for AML sanctions violation.
The RBI has adopted the tack of naming and shaming banks and there is some merit in having the regulator call them out regarding AML shortcomings. Around 70 per cent of AML actions have been against the traditional black money conduits for local businesses and regional politicians — cooperative banks.
The most fined set of banks by value have been PSU banks, though the number of actions is only 13 per cent of the total, which seems to be at odds with the fact that many are outdated in their outlook and yet continue to do the most business. Private foreign banks have seen token penalties despite some of them being the most heavily fined globally.
Indian banks need to renew their focus on AML compliance as traditionally this has not been accorded the resources or focus, simply because the outcome of AML failures hasn’t been serious.
The writer is Partner, Risk & Advisory, BMR Advisors. With inputs from Abhishek Bali, Senior Vice President, Risk & Advisory, BMR Advisors