MONEY LAUNDERING IN INDIA:

THROUGH THE LENS OF CASE

STUDIES

· Laws on Money Laundering:

Prevention of Money Laundering Act, 2002 (PMLA) was enacted to fight against the criminal
offense of legalizing income/profits from an illegal source. The Prevention of Money Laundering
Act of 2002 allows the government or a public body to seize property derived from unlawfully
obtained revenues.

Key Features of PMLA

1: Punishment for Money Laundering: Three to seven years imprisonment, up to ten years if
associated with drug-related crimes.

2: Seizure of Tainted Property: The suspected crime of AML in India proceeds can be forfeited to
the authorities for 180 days with permission from the government.

3: Adjudicating Authority: It decides the involvement of the property in money laundering,

relying on natural justice.

4: Burden of Proof: The innocent persons get to prove that the property that they possess is
legal, and the guilty people have to make efforts to prove it.

5: Appellate Tribunal: Listens to appealed cases from an adjudicating authority with field
Appeals held elsewhere, which can be taken to other higher courts.

6: Special Court: Investing by the government managing money laundering issues, in

conjunction with the Chief Justice.
7: FIUIND: The central agency analyses suspicious transactions by reporting them to the Finance
Minister.

Penalties for money laundering in India:

Imprisonment (3 to 7 years, with the option to extend to 10 years).

Fines (% of the laundered funds).

Proceeds were confiscated.

Attachment of properties.

The forfeiture of assets.

Increased penalty for repeat offenders.

METHOD OF MONEY LAUNDERING

There is a method followed by the offenders through which they commit the offense of money
laundering. The method of operation is as follows:

1. The first stage, 'placement', is where black money is introduced into the formal financial
system.

2. The second stage, 'layering', is where the money introduced into the system is layered
and spread over various transactions to legalize the money.

3. The final stage, 'integration', is where the money's association with the crime is sought
to be cleared, so it can be used by the offender as clean money.

CASE STUDIES ON MONEY LAUNDERING AND THEIR

IMPACTS:
Commonwealth Games (CWG) scam

Year of scam- 2010

Amount of money involved- 70,000 crore

Delhi, in 2010, saw one of the most notorious scams addressed as the Commonwealth Games
(CWG) scam. It was discovered that only half the amount received from the government was
used for Indian sportspersons, in contrast, the other half was deposited in the accounts of
individuals in power positions.

Under the CWG scam, the authorities hired companies that had overquoted the estimated
budgets as opposed to those that had great offerings at great prices in addition to better
services and equipment. Moreover, after the discovery of the scam, it was discovered that
several suspicious transactions were carried out with non-existing partners, while the workers
still needed to receive timely payment, thus causing the misuse of funds.

This scam can be said to be a planned act of corruption. Mr. Suresh Kalmadia, the CWG
Organizing Committee Chairman, and two of his close associates, Mr. Lalit Bhanot and V.K.
Verma, but also Sheila Dixit, were part of this scandal.

Suresh Kalamdi was detained by the CBI and served around 10 months of imprisonment. He,
along with his associates, were held guilty under several sections of the IPC and the Corruption
Act. The most important sections of the IPC they were charged with are as follows:

Section 120 (b) (criminal conspiracy),

Section 420 (cheating),

Section 468 (forgery), and

Section 471 (Using as genuine a forged document or electronic record).

IMPACTS:

 Delay in infrastructure projects; several venues were not completed on time.

 India's international image was tarnished due to corruption.

 Audit reports highlighted massive over-invoicing and kickbacks.

The 2G scam

Year of scandal – 2008

Amount of money involved- 176,000 crores

One of the greatest scams in the history of independent India is the 2G scam. It has also been
affirmed by the Times Magazine to be the second biggest example of the abuse of executive
power.

The 2G scam was discovered when the Comptroller and Auditor General (CAG) of India, in one
of its reports, estimated a loss of 176,000 crores in issuing licenses and allocating 2G spectrum
by the Department of Telecom.

CAG claimed that the government lost 176,000 crores because telecom operators were granted
2G licenses at extremely low prices instead of conducting free and fair auctions. Further, the
licenses were granted to ineligible applicants who had farce facts, incomplete information,
forged documents, and deceitful means to obtain licenses and gain access to the spectrum.

In this scam, A Raja, along with 14 other individuals and three companies, Swan Telecom,
Reliance Telecommunications, and Uninor, were the prime accused. The leading accused, A.
Raja, was said to have allocated airwaves and licenses for mobile phone networks in exchange
for bribes. In 2012, the Supreme Court invalidated all 122 licenses that were awarded in 2008,
asserting that such licenses must be allocated through auctions and fair bidding processes
alone. The Court said this process of allotment was “unconstitutional and arbitrary.”

In 2012, the Supreme Court, in this case, levied a fine of 5 crores on each of the three
companies—Unitech Wireless, Swan Telecom, and Tata Teleservices. However, in 2017, all the
accused in this scam were declared not guilty, including the prime accused, A. Raja, by a special
CBI Court. Moreover, a point must be taken into consideration that the appeal by the CBI against
this judgment is pending in the Delhi High Court.

IMPACTS:

 India’s ranking in Transparency International’s Corruption Perceptions Index dropped.

 The stock market experienced volatility, particularly in telecom stocks.

 The Supreme Court of India canceled 122 telecom licenses.

Recourses to Combat Money Laundering

The Kingfisher Airlines case

Year of scandal – 2007-2017

Amount of money involved- 9,900 crores

This scam started in 2007 when Vijal Mallya’s company, Kingfisher’s Airlines, purchased a low-
cost carrier, Air Deccan, that had been stranded for a long time. Unfortunately, Air Deccan faced
significant financial losses because of rising oil prices. So, to keep his business in the market,
Vijay Mallya borrowed huge amounts of money from multiple banks, in two years, the company
was in debt for around 50% of its net worth. Kingfisher Airlines faced several losses, and Mallya
defaulted on loans worth 9000 crores from several banks around 2013. Further, the Serious
Fraud Investigation Office (SFIO) found out that Kingfisher Airlines violated paramount
corporate ethics during its merger with Air Deccan.

It was found that the loans taken by Vijay Mallya were laundered overseas to various “tax
havens.” He would transfer the amount of the loan received to inactive companies and would
appoint dummy directors to serve his purpose. These companies were in seven countries,
United Kingdom, USA, Ireland, France, inter alia.

It was also alleged that Vijay Mallya diverted some loan money to fund his IPL cricket team- The
Royal Challengers Bangalore (RCB), and his F1 racing team- Force India. All this occurred when
the employees at Kingfisher were not paid their remuneration for 15 months. In March 2016,
Mallya escaped to the UK from India. In February 2017, an extradition request was sent to India.

In 2022, a four-month prison sentence was awarded to Vijay Mallya by the Supreme Court of
India for his bank loan default case. The bench, headed by Justice U. U. Lalit, also imposed a fine
of ₹2000. Now, Mallya is living in the United Kingdom and is on a bail extradition warrant, which
is executed by Scotland Yard.

IMPACTS:

 17 Indian banks reported Non-Performing Assets (NPAs) due to loans to Kingfisher Airlines.

 The State Bank of India (SBI) led the consortium with an exposure of ₹1,600 crore (~$250
million).

 Mallya's flight to the UK raised questions about India's extradition treaties.

Punjab National Bank Fraud case

Year of scandal – 2007-2017

Amount of money involved- around 11,400-13,500 crores

This is one of the most publicized and controversial money laundering cases in the history of
India. It is by far the biggest fraud ever detected by an Indian bank. This scam was
superintended by diamantaires Mehul Choksi and his nephew Nirav Modi, who conducted a
huge scam with the help of over 50 employees from the Punjab National Bank of the Brady
House branch in Fort, Mumbai.

The bankers used faux Letters of Undertaking (LoUs) worth more than 10,000 crores, which
were opened in branches of Indian banks to import pearls over one year. The employees issued
dummy bank guarantees to help them secure billions in foreign credit. Nirav Modi and Mehul
Choksi managed to get their first fraudulent guarantee in 2011, and from there, they got around
1200 more such dummy guarantees in the next 74 months without anyone doubting any
fraudulent activity. As per these LoUs, banks were to be held liable in matters of default. In
2018, PNB filed a suit with the CBI on the charges that Nirav Modi obtained these LoUs from
PNB without paying the margin amount against the loans. If any companies fail to pay the debt,
PNB would be liable to compensate for the same.

The Indian authorities are continually trying to extradite Nirav Modi and Mehul Choksi in the
money laundering case, to bring back to India these businessmen who were declared fugitive
economic offenders. In March 2019, Nirav Modi was spotted in London, and Choksi was seen in
Cuba. Nirav Modi is said to be in south-west London awaiting his extradition trial.

IMPACTS:

 PNB's market capitalization fell by over ₹8,000 crore (~$1.3 billion) following the revelation.

 Stock prices of PNB dropped by around 30%.

 Over 20 bank oƯicials were implicated.

Satyam scam (Satyam computers scam)

Year of scandal – 2009

Amount of money involved- 7,000 crores

Satyam scam, popularly addressed as India’s largest corporate scam or “India’s Enron Scandal,”
centers around B. Ramalinga Raju and his company titled “Satyam Computer Ltd.”, which was
the fourth biggest IT software exporter in the industry after companies like TCS, Wipro, and
Infosys. Satyam Computers Ltd. was founded in 1987 by two brothers- Rama Raju and
Ramalinga Raju. The company started with 20 employees and later employed around 50,000
and operated in more than 60 countries. The net worth of this company was as high as one
billion dollars in 2003 and went on to cross two billion dollars in 2008. The publicizers of the
company, to engage more investors, manipulated several figures relating to revenues, operating
profits, interest liabilities, and cash balances. Mr. Raju, the founder, would also create several
bank statements to exaggerate the balance sheet with cash that had no existence whatsoever.

This case or scam was exposed as early as 2009 when India was already in the middle of a
recession. The company and its founder confessed to misrepresenting and manipulating
accounts worth 7,000 crores in front of its board, stock exchanges, investors, and other
stakeholders.

After Raju confessed to this scam, he was imprisoned and was further charged with the
following offenses: Criminal conspiracy, Breach of trust, and Forgery.

And, the auditor of the company- PwC, was held liable for such a conspiracy, and his license was
repealed for 2 years

Recourses to Combat Money Laundering:

Despite having a clear picture of how money laundering occurs, it’s still a consistent challenge to
detect, prevent, and combat it effectively. Numerous examples of money laundering occur at
top institutions, so it’s essential to understand what strategies can be used to avoid it.

It’s the responsibility of financial institutions to have adequate anti-money laundering processes
and procedures in place (that meet the requirements as set out by law). Financial Institutions
need to take action to do this effectively, leveraging AML compliance solutions to ace this
process.

Some of the effective solutions to curb the problem of Money Laundering are:

1. Establish AML Compliance Policies, and make them accessible to all team members.

2. Prioritize KYC (Know Your Customer) Processes to authenticate customer information and
determine if customers are who they claim to.
3. Detect Suspicious Patterns by monitoring transaction patterns.

4. Using Technology to Detect Suspicious Activity; for example, a compliance system.

5. Training Team Members

6. Take a Risk-Based Approach by understanding the risk your organization faces and putting
controls in place based on their potential impact.